Overcoming Bias

Share this post

Selection Is Slow

www.overcomingbias.com

Discover more from Overcoming Bias

This is a blog on why we believe and do what we do, why we pretend otherwise, how we might do better, and what our descendants might do, if they don't all die.
Over 11,000 subscribers
Continue reading
Sign in

Selection Is Slow

Robin Hanson
Jun 25, 2011
Share this post

Selection Is Slow

www.overcomingbias.com
6
Share

If you imagine that a 25% cost advantage would let your firm quickly displace all rivals, think again. Yes more efficient firms and plants eventually displace less efficient ones, but it is easy to overestimate the strength and speed of this effect. For example, in a US manufacturing industry with five plants in use, the best plant will typically produce about twice as much with the same inputs (including materials, land, labor, etc.) as the worst plant. In India and China, it will make five times as much:

[The median] four digit SIC industr[y] in the U.S. manufacturing sector [has] a TFP ratio of … 1.92. … This … says … the plant at the 90th percentile of the productivity distribution makes almost twice as much output with the same measured inputs as the 10th percentile plant. Note that this is the average 90–10 range; … several industries see much larger productivity differences among their producers. U.S. manufacturing is … if anything … small relative to the productivity variation observed elsewhere. … [Researchers] find even larger productivity differences in China and India, with average 90–10 TFP ratios over 5:1.

These figures are for revenue-based productivity measures; i.e., where output is measured using plant revenues (deflated across years using industry-specific price indexes). TFP measures that use physical quantities as output measures rather than revenues actually exhibit even more variation than do revenue-based measures as documented. …

Another robust finding in the literature—virtually invariant to country, time period, or industry—is that higher productivity producers are more likely to survive than their less efficient industry competitors. …

Aggregate productivity growth in the U.S. retail sector is almost exclusively through the exit of less efficient single-store firms and by their replacement with more efficient national chain store affiliates. … Why is within-store productivity growth so small on average in retail, but not manufacturing? (more)

Yes, some of these large differences may be due to unmeasured quality differences.

Share this post

Selection Is Slow

www.overcomingbias.com
6
Share
6 Comments
Share this discussion

Selection Is Slow

www.overcomingbias.com
Overcoming Bias Commenter
May 15

This is indeed what efficient capital markets accomplish. However, I suspect that production in factories suffers some of the same difficulty as the real estate market. No two houses are really the same, and the value of a particular house is not the same to any two people looking at it. Thus we don't find effective 'commodity' markets in real estate, their is all sorts of room for extremely local expertiese to produce profits for extremely local traders, and there is little substitute when shopping for a house to spending lots of time looking at lots of houses.

I wonder if it is somehow similar with factories, that the 'trade secrecy' of good and bad factories alike, plus the vagaries and variations of 100s of inputs to the factory across the land- and mind- scapes leave it an intrinsically inefficient market, a market where the information needed to make it more efficient is vast and expensive to acquire?

Expand full comment
Reply
Share
Overcoming Bias Commenter
May 15

Why would I want to drive out my competitors? I could do what Toyota did for a long time -- slightly undercharge the competition, and take home the rest as profit.

Expand full comment
Reply
Share
4 more comments...
Top
New
Community

No posts

Ready for more?

© 2023 Robin Hanson
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing