21COE, University of Tokyo

MMRC Discussion Paper No. 51

MMRC
DISCUSSION PAPER SERIES

MMRC-F-51

Social Organization and Performance Inequality
in Japanese and American Markets
Manufacturing Management Research Center
Yuki Yasuda
August 2005

21COE, University of Tokyo

MMRC Discussion Paper No. 51

Social Organization and Performance
Inequality in Japanese and American Markets

Manufacturing Management Research Center
Yuki Yasuda
August 2005

Abstract
With census data on comparably defined American and Japanese markets, I assess the extent towhich competitive advantage is determined by market network structure in the two economies. I findsignificant differences between markets in the two economies, but on average, the social structuralparameters known to determine the relative performance of American markets similarly determine
the relative performance of Japanese markets. Profit margins are similar on average in corresponding
Japanese and American markets, but performance differences between similarly structured Americanand Japanese markets increase with competitive disadvantage. Being at a competitive disadvantage inJapan is less costly than in the United States.

With the rise of Japan as an economic power relative to the United States, much social scienceattention has been given to how Japan is different from the United States. The image of the Japanese
economy is a weave of dense and multiplex relations (Caves and Uekusa, 1976) in which visible andunspoken obligations obscure the market mechanisms that guide the day-to-day buying and selling(Dore, 1983; Kumon, 1992). The perception of a diffuse, permeable, and overlapping nexus ofrelations (Lincoln et al., 1992) at the core of the Japanese economy, combined with methodologicalculturalism (Hamilton, 1988) befog the situation. Studies have pointed out various dimensions of theJapanese economy believed to be characteristic of the economy and responsible for its highperformance: high savings ratios, groupism, work ethics and the spirit of Japanese capitalism (Dore,1

Yuki Yasuda

1983), human resource management and the employment system (Aoki, 1988), industrial policies
and protectionism (Eads, 1988).
A preliminary question remains unanswered. How different are the transactional environmentsof American and Japanese producers? If Japanese buying and selling is constrained in some way
different from the market constraints on American producers, different forms of organization are to
be expected. If markets in the two economies are defined by similar patterns of constrainedtransactions, then observed differences between organization forms in the two economies are due toother factors, such as cultural and historical differences in the development of the forms.
I have census data on buying and selling among American and Japanese markets, market
performance, and the organization of producers within markets. I find significant differences between
markets in the two economies, but on average, the social structural parameters known to determine
the relative performance of American markets similarly determine the relative performance ofJapanese markets. Japanese and American firms are built on the same patterns of market transaction
constraint. Their resource environments are similar in structure. Their differences lie in how they
respond to the constraints.

MODEL AND DATA
Network models of competition are a productive result of increased exchange between
economics and sociology over the last two decades. The sociological ideas elaborated by Georg
Simmel and Robert Merton of autonomy generated by conflicting affiliations are mixed with thetraditional economic ideas of monopoly power and oligopoly to produce network models of theextent to which producers in a market have a competitive advantage in negotiating the price of theirtransactions with suppliers and customers. The network models measure opportunities to broker
connections between others ― by having weak ties to distant others (Granovetter, 1973, 1983), bybeing between others (Freeman, 1977, 1979), or by having many diverse and exclusive relations(Cook and Emerson, 1978; Burt, 1980, 1982, 1983; Cook et al., 1983; Markovsky, Wilier and Patton,1988).
These variations on the brokerage theme are the foundation for the structural hole theory ofcompetition (Burt, 1992). The generating principle is that a transaction is more difficult to negotiate,and so less rewarding, when it is locked into other transactions that have to be negotiated at the sametime. Discontinuities between transactions create entrepreneurial opportunities for brokerage.
Brokerage provides information and control benefits. The benefits are a competitive advantage in2

Social Organization and Performance Inequality in Japanese and American Markets

negotiating transactions. So, the distribution of the discontinuities, or holes, in the social structure oftransactions give competitive advantage to certain players at the expense of others. Among otherthings, players with a competitive advantage are expected to get a better return on their investments;
e.g., faster promotions, higher profit margins, more sympathetic policy decisions.
The competitive advantage can be measured by the network concept of structural autonomy.
Applied to networks of buying and selling, structural autonomy increases with the extent to which
producers are organized within a market (few structural holes between producers) and transactions
are disorganized beyond the market (many structural holes between suppliers and customers).
Autonomous producers can negotiate advantageous prices in their transactions with suppliers andcustomers. The advantageous prices allow producer budgets to expand in various ways, including thebottom line; profit margins should increase with structural autonomy.
There is evidence to support the argument. Burt (1983) documents the association in 1967
between profits and structural autonomy in American manufacturing markets defined at broad anddetailed levels of aggregation. Burt (1988) extends the results into nonmanufacturing through the
1960s and 1970s. Using profit and network data on markets in other countries, similar results havebeen observed in Germany during the 1970s (Ziegler, 1982) and Israel during the 1970s (Talmud,
1992, 1993). There is also evidence to support the argument in interpersonal relations. Manager
promotions can be traced to the structural holes in a manager's network (Burt, 1992, Chap. 4), andstrategic political behavior is patterned by network constraints between organization elites (Garguilo,
1992, 1993). My purpose in this paper is to compare Japanese and American markets from network
perspective and see how well the argument describes performance differences between them.
For this paper, I use data on 44 aggregate markets distinguished by the Japanese Ministry ofInternational Trade and Industry (MITI). The 44 markets include 7 raw material markets 1 22
manufacturing markets, and 15 service and distribution markets. In addition, households andgovernment agencies are included as customer markets1 The Ministry of International Trade andIndustry constructed an input-output table of transactions among markets within each economy andbetween markets in the two economies (MITI, 1989). Transactions in the Japanese economy arebased on a 1985 census of establishments. Yen are converted to dollars at the 1985 exchange rate
(238.54 yen to the dollar, MITI, 1989, p.4). Transactions in the American economy are a
recompilation of data used by the US Department of Commerce to construct the 1982 benchmark
1

I’m ignoring the "unclassified" market of scrap, used and second-hand goods, noncomparable imports, andinventory valuation adjustments. Network constraint weights constructed with and without the "unclassified"market yield nearly identical transaction constraint coefficients (.98 correlation).
3

Yuki Yasuda

input-output table that was released in 1991. Instead of 40 players in Figure 1 aggregated into sevenmarkets, there are thousands of business establishments in the American economy aggregated into 44
markets, and thousands of establishments in the Japanese economy aggregated into the same 44
markets. The criterion for aggregation is the same. Business establishments are aggregated into thesame market if they depend on business with the same other markets. The data are a census ofbusiness establishments.
With the input-output table, MITI has provided a density table describing the network oftransactions among and between American and Japanese business establishments.
These are markets in the sense that they are defined to contain establishments producing
substitutable goods; each is obligated by cunrent production technologies to purchase a certain
proportion of supplies from specific other markets, and their customers are shaped by their own
technological requirements. This image of producers being competitors within the same market to theextent that they are substitutable in their transactions with suppliers and customers is a general one. It
is captured in theory by certain equivalence definitions in network analysis and is the basis forinterorganization resource dependence and the image of biological competition in population ecology
analyses of organizations (see Burt, 1992, Chaps 6 and 7, Burt and Talmud, 1993, for elaboration).
I use concentration data to measure producer organization inside market; O varies from zero to
one with the extent to which there are few independent producers. Each aggregate market is a set ofmarket segments defined in the United States by four-digit Standard Industrial Classification (SIC)
categories. Variable O is average concentration within segments. 2

Concentration data on

manufacturing are from the Census of Manufactures, concentration in nonmanufacturing isapproximated with sales data in other census publications from the US Department of Commerce,
and the map of SIC categories into aggregate markets is taken from the Survey of Current Business(see Burt, 1988, p. 370; 1992, pp. 89-91, for detailed discussion). To describe the Japanese markets, I
used unpublished records of four-firm concentration in manufacturing and a few nonmanufacturingmarkets provided by the Fair Trade Committee of Japan for 1988.
In the remaining nonmanufacturing markets, I approximate concentration with sales data as in
the US. I identified the four largest firms operating in each market (in the Toyo Keizai compilation of
10,000 largest Japanese firms for 1985), summed their sales, and divided by total market sales. These2

O is defined as follows; O =Σk wkCRk, where segment weight wk is the proportion of market sales that comefrom segment k (wk = Sk/(Σ Sk), where Sk is the dollars of sales by establishments in segment k), and CRk is
the four-firm concentration ratio for segment k (largest sum of sales for establishments owned by any four
companies in the segment divided by total sales by all establishments in the segment).
4Social Organization and Performance Inequality in Japanese and American Markets

can be crude approximations. Ill use multiple strategies for comparing producer organization between
markets.
Markets aren't independent production sites. They are variably interdependent within thepolitical economy as a production network. A market's position in the network of variableinterdependence has implications for market behavior. This can be measured by the extent to which
producer buying and selling is concentrated in a few key customer and supplier markets and thosemarkets contain few independent players. The essential qualities to be captured by the measure oforganization beyond markets are the extent to which producers do business in very few different
markets and those few are tied by exclusive dependence on one another (see Burt, 1992, pp. 54-62 on
alternative specifications and connections with laboratory results on exchange networks). Network
weight wij measures the extent to which producers in market i are dependent on, affected by, can't
avoid, conditions in market j. Transaction constraint coefficient cij varies from zero to one measuring
the extent to which there are few independently players in key market j: cij = wijOj. So, three
conditions constrain the transaction with market j: (1) Buying and selling with market j is a highproportion of producer business, (2) Other markets where producers buy and sell are in turndependent on business with market j, and (3) there are few competitors in market j to play against
one another.
Producers in the structurally autonomous market positions of a population are expected to show
higher returns to investment; accumulating resources and further opportunities. Their structuralautonomy is defined by the extent that there are numerous structural holes among the players withwhom they negotiate and no holes among the producers;
Ai =f(Oi, ci1, ci2, ci3,...)
Hierarchical pattern in the constraint parameters indicates a strategic partner being usedlegitimate the central player (Burt, 1992, chap. 4), but level is the feature of constraint relevant for
performance when legitimacy isn't an issue. The higher the aggregate level of constraint on producers,
the lower their expected returns to investment. The sum of constraint parameters measures theaggregate constraint on producers; C varies inversely with the extent to which a market's suppliersand customers are spread across many disconnected markets that contain many competitors. The
negative association between performance and constraint is the critical piece of evidence that
establishes the construct validity of the constraint parameters. If the cij measure the resource
constraints that define optimum producer organization forms, then the aggregate level of constraint
should be negatively correlated with producer rates of return.
5

Yuki Yasuda

BASIC RESULTS
I measure market performance with price-cost margins computed from the input-output data.
Price-cost margin P is net market income divided by total income ― specifically, dollars of value
added minus compensation to employees, quantity divided by total market income. This is a standard
measure for comparing performance across manufacturing markets (attributed to Collins and Preston,1969), and a reliable indicator when computed from input-output data for comparing markets moregenerally (Burt, 1988, pp. 371-375).
Performance isn't identical in corresponding Japanese and American markets, but it is very
similar. Figure 2 plots the price-cost margin in each American market against the margin in thecorresponding Japanese market. Markets above the diagonal line are more profitable in Japan. For
example, steel producers in Japan earned an average 250￠ profit on each dollar of sales in the
mid-1980s, while American steel producers earned only 6￠ profit. Similarly, finance, farming, andbeverages and tobacco are noticeably more profitable in Japan. Below the diagonal in Figure 2, crude
petroleum and natural gas drilling ("oil & gas"), forestry, and coal mining are noticeably more
profitable in the United States. These deviations notwithstanding, market performance is moresimilar in the two economies than it is different. The price-cost margins in corresponding markets arecorrelated.76, standard deviations are identical within the two economies (.152), and variation withineach economy makes negligible the slight mean difference between the economies. Mean price-cost
margins are.23 across the Japanese markets, and .19 across American markets. 3 No significant
performance difference between the two economies.

3

1.1 t-test with 86 degrees of freedom fails to reject the null hypothesis of no performance difference

between the two economies, P =.30.
6Social Organization and Performance Inequality in Japanese and American Markets

Figure 1. Price-Cost Margins in Corresponding
Japanese and American Markets

Table 1. Basic Results Predicting Market Price-Cost Margins.
All Markets

Japanese
Markets

AmericanMarkets

88

44

44

R

.507

.448

.596

Intercept (α)

1.002

1.008

1.007

Adjustment for Higher
Japanese Profits.042[.139](1.6)――

Adjustment for Higher
Land-Oil Profits.328[.686](8.7).329[.693](5.5).325[.685](6.7)

Effect of Disorganization
Within Markets (β)-0.035[-.263](-3.3)-.025[-.235](-2.0)-.070[-.329](-3.3)

Effect of Organization
Beyond Markets (γ）-0.042[-.231](-2.7)-.059[-.266](-2.1)-.034[-.197](-1.9)

Number of Markets

2

Note―These are ordinary least-squares estimates predicting price-cost margins withmodels described in the text. Standardized7coefficients are in [brackets] and routine ttests are in (parentheses).

Yuki Yasuda

The results in Table 1 extend the similarity to market structure effects in the two economies. The
basic model states performance as a function of structural autonomy, which decreases with producer
disorganization and decreases with organization beyond the market (Burt, 1992, pp. 92-100; Burt,
Yasuda, and Guilarte, 1993):ℯP = A =α( l - O)βCγ
where＾
P is the price-cost margin expected from market structure, O is concentration, and C is the sumof constraints on producer transactions with supplier and customer markets. Estimates of theparameters are presented in Table 1 across all 88 markets, and across the 44 markets within each＾ decreases significantly with market disorganization 4 andeconomy. The expected price-cost marginorganization beyond the market. 5 In addition, analysis of American markets through the 1960s, 1970s,
and into the 1980s distinguishes land and oil markets for their autocorrelated profits consistently
higher than expected from market structure. The markets returning exceptional profits are real estate,crude petroleum and natural gas (oil and gas; not to be confused with petroleum refining), forestry
and fishery products, and farming (excluding livestock). The dummy variable adjustment for thesemarkets in Table 1 shows their significantly higher price-cost margins in both economies. Finally,
returning to the null hypothesis of no performance difference between Japanese and American
markets, the first column of Table 1 contains a dummy variable distinguishing Japanese markets from
American markets. The test for no performance difference is now more precise because market
structure variables O and C hold constant a portion of the price-cost margin variance within eacheconomy. Margins are still higher in Japanese markets, and the t-test of 1.6 is stronger than thezero-order test of 1.1, but there is still no significant performance difference on average between
corresponding Japanese and American markets. 6
In sum, despite the very broad definition of markets in these data, there is evidence to arguefor asimilar structure-performance connection in Japan and the United States. I've compared profit
margins for 44 kinds of production activities in the two economies. The market structure effects
known to predict performance differences between American markets ― performance decreasing
with market disorganization and the network constraint of organization beyond the market ― also
predict performance differences between Japanese markets.

4β< 0, with t-tests of -2.0 to -3.3.
γ< 0, with t-tests of -1.9 to -2.7.
6
With 83 degrees of freedom for the 1.6 t-test, the null hypothesis has a .11 probability of being true under aroutine two-tail test.
58Social Organization and Performance Inequality in Japanese and American Markets

CLOSER LOOK AT MARKET STRUCTURE
Though differences between the Japanese and American markets are negligible relative to theirsimilarities, the differences exist. I'll now look more closely at market structure in the two economies
to better understand the observed performance differences. Market structure in the network model isdefined by two variables; producer organization O, here measured by concentration, and the networkof market interdependences defined by the network constraint weights wij measured with the
input-output data on dollars of buying and selling between markets. The two variables combine todefine the level of constraint C on producer buying and selling with suppliers and customers.

Market Interdependence
The volume of buying and selling between markets is determined by technology. Car producers,
for example, are obliged under current technology to purchase supplies from specific markets; steel,rubber, plastics, electronics, and so on. It is a short step to conclude that market interdependence inJapan should look the same as in the United States to the extent that production technologies are
similar in the two economies. The conclusion would be true if the economies were self-contained.
But the inter-market buying and selling dictated by production technology can be transacted inside oroutside the economy; between domestic producers or with producers in foreign markets. Market
interdependence can be different in Japan and the United States to the extent that foreign trade affects
different markets in the two economies.

Figure 2.

Corresponding Japanese and American Transactions.

(Transaction strength is percent of domestic buying and selling by two markets
that occurs between the markets. Transactions under one percent are excluded.)9

Yuki Yasuda

Table 2. Correlations between Japanese and American
Transactions by Kind of Markets Connected.
Distribution
Raw Materials
Manufacturing
and Services
Raw Materials

.951
( 21)

Manufacturing

.502
(154)

.721
(231)

Distribution andServices

.347
(105)

.763
(330)

.694
(105)

Note - Transaction strength is the percent of domestic buying and selling by twomarkets that occurs between the markets (plotted in Figure 3). Number oftransactions in each correlation is given in parentheses.

Figure 3 and Table 2 present results on the relative strength of transactions between Japanesemarkets and the corresponding strength of transactions between their American counterparts.
Transaction strength is based on the buying and selling between markets given in the input-output
table. Divide the buying and selling between two markets by the sum of all buying and selling by themarkets with other sectors in their economy. The result multiplied by 100 is the percent of domestic
buying and selling by two markets that is conducted with each other. 7 There are 946 transaction
dyads among the 44 markets in each economy. Transactions above the diagonal line in Figure 3 are
conducted more between domestic producers in the Japanese economy. The three solid dots are
extreme cases: Japanese machinery and metal products are more often constructed from Japanese
steel (American machinery and metal products are more often constructed from imported steel).
Household appliances in Japan are more often constructed from Japanese electric parts andaccessories. Transactions below the diagonal line in Figure 3 are conducted more between domestic
producers in the American economy. Petroleum refining is more dependent on crude petroleum from
American producers, and power (electric and gas) utilities are more dependent on oil and gas fuelsupplies from American firms. Americans eat more American livestock, and that livestock is more
dependent on feed grains from American farms. Finally, American medical and health services are
7

Specifically, let dij be the combined dollars of sales and purchases between markets i and j; dij = zij + zji. Let
SUMi be the summed sales and purchases by producers in market i, excluding their business with one another;
SUMi = Σj dij. The symmetric transaction strength measure in Figure 3 and Table 2 is 100*dij/(SUMi + SUMj
- dij).
10

Social Organization and Performance Inequality in Japanese and American Markets

more often provided with instruments manufactured by American firms. 8
Transactions in the two economies are otherwise quite similar. The correlation between the 946
corresponding transactions in the two economies is.816 if the seven solid dot outliers in Figure 3 are
excluded. That's two-thirds of variance in transaction strength identical between the two economies.
Table 2 shows how the aggregate correlation varies across kinds of markets. For example, there
are seven raw materials markets in the MITI input-output table, and so 21 transaction dyads between
raw materials markets. Their relative strength is very similar in Japan and the United States (.951
correlation).
Transactions involving manufacturing are very similar, in the two economies, whereastransactions between raw materials markets and the 15 distribution and service markets are least
similar. 9 9 An illustration is the greater tendency for American power utilities, at the lower-right of
Figure 3, to get their oil and gas fuel supplies from American producers. I rank-ordered the 105transactions in the lower-left cell of Table 2 by the absolute difference of their magnitudes in Japanand the United States. The oil with power utilities transaction named in Figure 3 tops the list (.5%transaction in Japan, 8.7% in United States). The second largest difference also concerns fuel for
power utilities. American power utilities are more likely to get their coal supplies from Americanmining firms (.7% transaction in Japan, 3.5% in United States). The third largest difference is muchsmaller and again concerns fuel supplies. The transaction between the real estate market and crude
petroleum and natural gas producers is larger in the United States (1.1% versus 0.0% in Japan). Put
these three transactions to one side, and the remaining 103 transactions are very similar in Japan andthe United States (0.1% average difference,.77 correlation).
In sum, the network of market interdependencies is similar in Japan and the United States ―allowing for certain outlier transactions. Reflecting Japan's scarce natural resource, transactions
between power utilities, petroleum refining, and crude petroleum and coal are conducted more
8This is the only transaction for the medical and instruments markets that is so different in the two economies.
I constructed a dummy variable for all transactions involving the medical market and another distinguishing alltransaction involving the instruments market. I computed the absolute difference between transactions in Japanand the United States, and regressed differences across the two dummy variables. Differences are notsignificantly higher for either dummy (with all 946 transactions included, .0 15 multiple correlation, or with theseven solid dot outliers in Figure 3 excluded,.069 multiple correlation). The next largest difference is theslightly higher tendency for Japanese medical services to be provided with supplies from Japanese chemicalcompanies (chemicals-medical transaction is 1.3% in US versus 3.9% in Japan).
9
Correlations between transactions involving manufacturing are strong, but all increase to over.8 when theseven outlier markets in Figure 3 are excluded (.839 across 153 transactions with raw materials markets,.831
across 329 transactions with distribution and services markets, and.845 across 228 transactions with othermanufacturing markets). The weakest correlation is the.347, in the lower-left of Table 2, across transactions
between the 7 raw materials markets and the 15 distribution and services markets.
11

Yuki Yasuda

between domestic producers in the United States (three transactions). Steel for machinery and metal
products is more often purchased from domestic producers in Japan (two transactions). Household
appliances are more constructed in Japan with parts and accessories purchased from Japanese
producers (one transaction). The American taste for beef is reflected in the larger domestictransactions among the American food, livestock, and feed grain markets (two transactions). Medical
and health services in the United States are more often provided with instruments manufactured byAmerican firms (one transaction). Put these nine of 946 transactions to one side, and the transaction
strength between two Japanese markets is correlated.825 with the strength of transaction between thecorresponding two American markets. Moreover, the magnitudes of the differences are small. The
absolute difference between the nine outlier transactions in Japan and the United States varies from
2.8% to 21.3%, with a 5.2% standard deviation and 8.8% mean. The absolute difference between theother 937 transactions varies from being identical to a difference of 5.4%, with a 0.5% standard
deviation and 0.3% mean difference.

Organization within Markets
Given similar patterns of producer dependence on supplier and customer markets, the otherpotential difference between markets in the two economies is the organization of producers within
the markets. The difference is clear in Figure 4. Concentration in almost every Japanese market is ashigh, or higher, than concentration in the corresponding American market. On average, Japanesemarkets are more concentrated. 10 With the network of market interdependences similar in Japan andthe United States, the higher concentration within Japanese markets means greater constraint on
producer transactions with supplier and customer markets. Constraint C varies from.01 to.269 acrossAmerican markets, with.058 mean and.061 standard deviation. Across Japanese markets, constraint
varies from.022 to.413 with.096 mean and.09 standard deviation. Market constraint is significantly
higher in Japan. 11 Since profit margins are similar in corresponding American and Japanese markets,
the story here would be that better organized Japanese producers, having to negotiate transactions
with better organized suppliers and customers, end up earning the same relative profit margins as
their less well-organized American counterparts.

10
112.75 t-test, P =.007.
2.30 t-test, P=.020.
12

Social Organization and Performance Inequality in Japanese and American Markets

Figure 3.

Concentration in Corresponding Japanese and American Markets.

An interesting story, but it is suspect. My concentration ratios are approximated in several
Japanese and American markets from corporate sales data. The large firms used to approximate
concentration are diversified across multiple markets. Treating all their sales as if from one market
overstates their sales in the market. Concentration approximated from the aggregate sales of large
diversified firms is likely to be higher than census data on concentration which is computed fromestablishment sales data. The concepts of effective organization and effective market constraint canbe helpful as introduced elsewhere to resolve issues in measuring producer organization (Burt,
Yasuda and Guilarte, 1993). Effective organization O varies from zero to one, and effective market
structure constraint M is greater than zero to the extent that producers are in effect disorganized anddependent on effectively well-organized supplier and customer markets (see Appendix for detail).
The question answered is the following: To obtain their known price-cost margin, operating fromtheir known network position in the economy, how well organized must producers be? The variableO that answers the question is "effective" organization in the sense that producer organization isinferred from its effects.

13＾Yuki Yasuda

Figure 4.

Form of Markets Structure Effects.

(Dots indicate where markets occur on the function. One Japanese market to the far rightis excluded to amplify the section of the function describing most markets.)Market performance is plotted across levels of effective market structure constraint in Figure 5.
Three points are illustrated. First, and in contrast to the Figure 4 results, there is no significant
difference between Japanese and American markets in the effective organization of producers or theeffective market structure constraint on producers. Effective organization is slightly higher in the
United States, but the difference is negligible. 12 Therefore, given similar networks of market
interdependence in the two economies, it isn't surprising to find no significant difference in theeffective market structure constraint on American and Japanese producers. 13
Second, the curves in Figure 5 show that market structure conditions of monopoly control yield
similarly high profits in both economies. These are the markets to the left of Figure 5 - variable ＾M isnear zero to the extent that producers are well-organized and do their buying and selling with diverse,
disorganized suppliers and customers. The steep decline in expected price-cost margin the left of
12
13.793 mean O versus.738 in Japan; 1.23 t-test, routine two-tail P is.22.
.028 and.021 mean M in US and Japan; 1.56 t-test, routine two-tail P is .12.
14

Social Organization and Performance Inequality in Japanese and American Markets

Figure 5 replicates results reported for more detailed American markets (Burt, 1992, Chap. 3; Burt,
Yasuda and Guilarte, 1993, Figure 2). The strongest market structure effects occur where market
structure begins to move away from conditions of monopoly control.
Third, the location of higher performance in Japanese markets is identified. Given a Japanesemarket and an American market at the same level of producer disorganization negotiating withsimilarly organized suppliers and customers, higher profits are expected in the Japanese market. The
amount higher increases for producers at a competitive disadvantage. Profit margins don't decrease as
quickly in Japan as market structure constraint increases. 14 The result is an increasing profit gap
between Japanese and American markets with increasing levels of competitive disadvantage. For
example, at the far right on Japanese curve are: education, textile, food, and transportation service
markets. 15 They perform better than similarly disadvantaged American markets do. At the far right on
American curve are non-profit organization, steel, transportation equipment (except automobile), andconstruction markets. 16 Their price-cost margins are much less than those of similarly disadvantaged
Japanese markets. The insert graph in Figure 5 shows the gap. There is little difference in expected
price-cost margin for producers near the extreme conditions of monopoly control (M close to zero).
Decrease producer organization, or increase the organization of suppliers and customers, such thatmarket structure constraint M increases to.01 , and the Japanese producer can expect to earn 30 more
profit on each dollar of sales than a similarly constrained American producer. Increase constraint to
its average level,.025, and the Japanese producer can expect to earn 60 more profit per sales dollar
than a similarly constrained American producer. Increase constraint to the maximum among
American markets,.05, and the Japanese producer can expect to earn 80 more profit per sales dollar
than a similarly constrained American. The point is that the biggest performance differences between
similarly structured American and Japanese markets occur between the most competitively
disadvantaged markets. Being at a competitive disadvantage in Japan is less costly than in the
United States.
14

γis -.128 across American markets, -.106 in Japan. This result could also be obtained with theconcentration data, but it is obscured in the separate direct and indirect effects, β and γ, in Table 1. Insteadof defining effective market structure constraint M, with effective organization scores O, define observed
market structure constraint M with concentration data O. The expected price-cost margin, ℯP= α[M]γ, isdefined by the following ordinary least-squares estimates; α is 1.069, γ is -.034 across the Japanesemarkets; and α is.972, γis -.048 across the American markets. The smaller γ shows that margins decline
more slowly in Japan with increasing market structure constraint.
15
Those markets plus repair, civil engineering, non-profit organization, paper products, forestry, and wooden
products markets are the 10 markets on the far right.
16
Those markets plus, electric and communication equipment, non-ferrous metal, textile, automobile, parts andaccessories of electric and electronic equipment, and civil engineering are the 10 markets on the right.
15

Yuki Yasuda

SUMMARY
With census data on comparably defined American and Japanese markets, I have assessed theextent to which competitive advantage is determined by market network structure in the two
economies. I draw three conclusions from the analysis.
First, despite the very broad definition of markets in these data, there is evidence to argue forsimilar structure-performance connections in Japan and the United States. The market structure＾＾
effects known to predict performance differences between American markets ―＾ performancedecreasing with market disorganization and the network constraint of organization beyond the market― also predict performance differences between Japanese markets.
Second, the network of market interdependences is very similar in Japan and the United States― allowing for certain outlier transactions. Transactions between power utilities, petroleum refining,and crude petroleum and coal are conducted more between domestic producers in the United States.
Steel for machinery and metal products are more often purchased from domestic producers in Japan.
Household electrical appliances are more constructed in Japan with parts and accessories purchasedfrom Japanese producers. The American taste for beef is reflected in the larger domestic transactions
among the American food, livestock, and feed grain markets. Medical and health services in the
United States are more often provided with instruments manufactured by American firms. Put aside
these nine outliers among 946 transactions, and the transaction strength between two Japanesemarkets is correlated.825 with the strength of transaction between the corresponding two American
markets.
Third, profit margins aren't identical in corresponding Japanese and American markets, but they
are sufficiently similar in relative magnitude across markets for the average difference between
Japanese and American markets to be attributed to random chance. The performance difference
varies with market structure, and, between similarly structured American and Japanese markets, they
increase with competitive disadvantage. Being at a competitive disadvantage in Japan is less costly
than in the United States.

APPEND IX
Define Markets
Applying the structural hole argument in empirical research involves four steps. The first is toaggregate players into markets. This is analogous to the familiar network analysis task of reducing a
network to a density table (which could then be further reduced by recoding entries to zeroes and16Social Organization and Performance Inequality in Japanese and American Markets

ones to define a blockmodel). Figure 1 is an illustration (taken from Butt, 1992). The sociogram is a
fragment of the trade network around four producers in the market distinguished by the gray circle.
Producers buy supplies from certain markets and sell their goods to customers in certain markets.
Each dot is an organization, a player, producing something. Lines indicate connections between
producers within markets and indicate aggregate buying and selling between markets. Players arecontained in circles by their equivalent relations to players in other circles. The four players in thegray circle at the center of the figure, for example, all have relations with someone in each of the six
other circles. The many inter-player relations between circles are replaced by a single line indicating
their aggregate inter-market relation. The circles are markets in the sense that players within circles
are substitutable. The relational resources that one player brings to transactions are what other players
in the same circle bring.

Figure 5.

Network Fragment Illustrating Market Structure Constraint.
A
B

F

C

E

no holes between markets =no holes within markets =network constraint = cij =DA
0.15121.00000.1512B
0.08510.12500.010617

C
0.02780.12500.0035

D
0.04941.00000.0494E
0.04340.12500.0054F
0.04341.00000.0434

Yuki Yasuda

Measure Organization Within Markets
The second step is to measure the extent to which producers are connected within markets suchthat there are few choices between independent trade partners for players dealing with the market. Of
alternative ways to measure producer coordination (e.g., Burt, 1992, p. 63-64), concentration ratios
are simple and have been successful in empirical research. Coordination is high to the extent that a
few disconnected producers are responsible for a large proportion of market output. Assume that the
producers in Figure 1 are the same size. A producer in the gray circle accounts for 25% of market
business, the coordinated producers in market A account for 100% of their market's business, and asingle producer in disorganized market C accounts for 12.5% of market business.

Measure Organization Beyond Each Market
The task of the third step is to measure the extent to which there are few structural holes between
producer supplier and customer transactions. This can be measured by the extent to which producer
buying and selling is concentrated in a few key customer and supplier markets and those markets
contain few independent players. Network constraint weight wjj is the squared proportion of
producer i business that directly or indirectly involves market j :wij = (pij + Σq piqpqj)2,
where i≠q≠j and pjj is the proportion of producer business that directly involves market j. The
direct proportion pij is the dollars of buying and selling between markets i and j, (zij+zji), divided by
the sum of all producer buying and selling with other markets; Σj(zij+zji), i≠j, where zij is dollars ofsales from market i to j in the input-output table. The exact specification of the network weights isarbitrary.
The table at the bottom of Figure 1 illustrates constraint. Transactions between markets are
dichotomous in the illustration. Proportions are therefore one over the number of a market's ties.
Columns in the table show the extent to which gray-circle producer transactions with eachsupplier-customer market are constrained. The constraint coefficient cij (bottom row of table) is the
product of coordination among players in market j (Oj in second row) and the coordination oftransactions through the market (network weights wij in first row). Producer transactions with market
C are least constrained. Market C players are disorganized and have no business with the othermarkets. Producer transactions with market A are most constrained. Market A players operate as asingle organization and do business in three of the other supplier-customer markets.

18

Social Organization and Performance Inequality in Japanese and American Markets

Define Structural Autonomy To Predict Performance
There are two directions to go with the constraint parameters. One leads to theories of social andformal organization. The transaction-specific cjj describe the resource constraints that shape the formof organizations expected to be successful in a market. In structural hole theory, they measure thecost of producers doing business with market j under the rules of competitive pricing. If businesswith market j is constrained, then producers have an incentive to move the transaction from the rulesof competitive price to another context; vertically integrating into market j, for example, so that
corporate authority defines the negotiation. In transaction cost theory, the constraint parameters are
the criterion for Coase's entrepreneur deciding to vertically integrate into market j. Their role in theorganization theory of resource dependence (Pfeffer and Salancik, 1978; Pfeffer, 1987), transaction
cost (Coase, 1937; Williamson, 1975, 1989), and population ecology (Hannan and Freeman, 1989) isreviewed elsewhere (Burt, 1988, pp. 390-393; 1992, Chaps. 6 and 7; see Davis and Powell, 1992, formore detailed review of resource dependence and transaction cost theory).
The other direction to go with the constraint parameters leads to stratification theories ofinequality and achievement. The sum of constraint parameters measures the aggregate constraint on
producers; C varies inversely with the extent to which a market's suppliers and customers are spread
across many disconnected markets that contain many competitors.
Ci = Σjcij = ΣjwijOj,
where i≠j. In Figure 1, aggregate network constraint on the gray-circle producers is the sum of
the transaction-specific constraints (C =.26). For each of the aggregate markets, I have 43 constraint
coefficients from the other production markets, plus a coefficient for households, and another forgovernment. Variable C is the sum of 45 cij for each producer market i.

Estimate Effective Organization
I have measured market structure to predict market performance. The price-cost marginexpected in a market is a function of market structural autonomy where structural autonomy inmarket i is defined as;＾ = Ai = α(l-Oi)β(Ci)γ = α(l-Oi)β(Σj wijOj)γ,ℯP
where i≠j, β is the direct effect of producer disorganization on performance, and γis the indirect
effect on performance of producer organization filtered through the network of market
interdependencies wij. I am confident in the census data on market performance and the network ofmarket interdependencies, but am suspicious of the concentration data on organization within
19

＾

＾
＾

Yuki Yasuda

markets. Consider the following model in which observed producer organization, concentration O, isreplaced by a measure of organization inferred from its effects, effective organization O:ℯP=α[(k-Oi)(Σj wijOj)]γ,
where i≠j, constant k equals 1.001, and the term in brackets is the aggregate effective market
structure constraint on producers;＾ℯP=α[M]γ.
This is a summary expression of the market structure-performance linkage, in which ＾M is theeffective market structure constraint. Effective organization and effective market structure constraints
are distinct from variables such as concentration which measure observed features of producer
organization believed to be responsible for market performance. There are no degrees of freedom.
Performance in each market is completely determined by the direct effect of effective organization
among producers and the indirect effect of effective organization in key supplier and customer
markets. 17

17

The Newton-Raphson iterative algorithm for obtaining effective organization scores is described in the
Appendix to Burt, Yasuda and Guilarte (1993). Applied here, the algorithm converged in 39 iterations for theAmerican markets and 41 iterations for the Japanese markets, with a.001 convergence criterion. The direct andindirect effects of producer organization are equal in this application (ratio r is set to 1.0; Burt, Yasuda andGuilarte, 1993, Table 7). Observed price-cost margins are correlated 1.0000 with the margins expected from
effective market structure constraint. I tried alternative start values for the iterations; the observed concentration
scores and random fractions drawn from a uniform distribution. Effective organization scores obtained with thealternative start values are correlated 1.0000.
20

Social Organization and Performance Inequality in Japanese and American Markets

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