Collaborative research and meetings between economists in the United Kingdom and France have assumed growing importance in recent years. The Seventh Anglo-French Colloquium in Political Economy was held at the Maison des Sciences de l'Homme in Paris on 29-30 May 1985. It was jointly financed by the MSH and the Economic and Social Research Council and organized by the Centre d'Economie Quantitative et Comparative and CEPR.

The Colloquium covered a range of topics, in which the common theme was the relationship between industrial organization and industrial economics and the possibility of bringing new theoretical ideas from the former to bear on the latter. The sessions included oligopoly theory and product differentiation, the strategy and organization of the firm, industrial structure and trade, and industrial policy. The proceedings took place in both languages, without simultaneous translation.

Two papers on strategic behaviour were presented in the first session. 'Strategic Groups and Monopolistic Competition', by Gabrielle Demange (Ecole Polytechnique) and Jean-Pierre Ponssard (ENSAE), analysed the pricing policies of enterprises in markets where products were differentiated. In their model (based on work by Selten), there were two firms whose equilibrium profits depended on their relative costs, the size of their respective potential markets, and the overall price elasticity of demand. There are three possible types of equilibria: pure duopoly, monopoly with free entry, where the more efficient firm sells at its monopoly price regardless of its competitor's decisions, and monopoly with limit pricing, where the more efficient firm prices below the monopoly price in order to drive out its competitor. When there is little product differentiation, the more efficient firm will try to unify the market if its own potential market is smaller; but with more differentiation, it may seek to differentiate the market even further.

Huw Dixon (Birkbeck College) spoke on 'Strategic Investment in an Industry with a Competitive Product Market'. He showed that 'strategic' investment decisions may bring welfare losses even when product markets are competitive. This is because production costs will exceed minimum long-run costs, with a consequent loss of consumer surplus, and the asymmetry between capital and labour input choices may lead to undercapitalization.

Product differentiation was also the focus of two further papers, one by Jean-Claude Rochet (Ecole Polytechnique) with Paul Champsaur, the other by John Sutton (LSE and CEPR) with Avner Shaked (LSE). In Rochet's analysis, enterprises chose the number and variety of their products. If the firm chose to produce a wide range, market segmentation and monopoly profits were possible, but there was a greater risk of price wars with other producers. A particularly interesting result appeared in the case of duopoly, where under certain conditions each firm would wish to create gaps in the market, so that the range of qualities available would be limited. Sutton and Shaked considered both horizontal and vertical differentiation in their analysis. One example of vertical differentiation was a natural oligopoly, which they had considered at length in other work. One possible approach was to imagine a sequence of decisions, first on the qualities of goods to be produced, second on their prices (using the Nash equilibrium concept for both). Sutton and Shaked conjectured that a unique equilibrium might not exist in the case of vertical differentiation: this would allow scope for policy intervention to affect the outcome.

The session devoted to the strategy and organization of the firm included presentations both of theoretical work and of its applications. Claude Crampes (Toulouse) and Michel Moreaux (Toulouse) discussed 'Vertical Integration and Increasing Returns'. They considered the case of a good sold on a competitive market and produced using two inputs, one produced competitively, the other by a monopoly. If that monopolist takes control of the market for the final output as well, does it necessarily follow that total production will fall? Crampes and Moreaux conclude that it may not, because the price of one of the inputs to the user (now the monopolist) will fall, and production may rise. In particular, with increasing returns to scale in the production of the final good, and no substitutability between the inputs, vertical integration will definitely increase output.

Alexis Jacquemin (Louvain) presented joint work with Marcel Boyer on 'Organizational and Industrial Actions for Efficiency and Market Power'. They sought to explain the existence, predominance and persistence of large corporations, and proposed a framework for interpreting the recent industrial organization literature on this issue. The analysis distinguished on the one hand between the firm's actions at the levels of production and of organization, and on the other hand between strategic actions and those intended to raise efficiency. This led to a focus on the strategic actions taken at the organizational level, which they saw as the key link between research on transaction costs and organization and work on strategic entry deterrence.

The same literature was considered from a quite different viewpoint by Ian Hilton (Unilever), who spoke on its relevance to business planning. He stressed three major themes. Analyses of competitive strategy had drawn attention to the possibilities of influencing the degree of competitive pressure for certain products by launching other products directed at different segments of the market. This illuminated the process by which entry was discouraged, and emphasised the concepts of credibility, reputation and commitment. The theory of repeated games had also proved useful in analysing situations in which the firm was likely to encounter the same competitors on different markets and at different times. A second theme was again product differentiation, where empirical work had shown that the best market performances were explained less by the relation of quality to price than by the creation of sufficient differentiation from competitors' products. Finally, research on the decision-making structure of the firm had largely clarified the choice between the advantages of decentralization and the necessity of centralizing major strategic decisions.

Roger Guesnerie (EHESS) presented joint work with Jean Tirole on 'The Economics of Research and Development', in which they surveyed a wide range of recent theoretical literature. Guesnerie and Tirole focussed on the comparison between the private and social value of innovation in a system with patents, and the analysis of different forms of contests (competitions) among firms for innovations. Their synthesis of these issues, broad though it was, still permitted only brief mention of other important problems, such as the firm's internal strategy for efficient search, the duplication of innovative effort among competing firms, the interactions between R&D decisions and the other strategic decisions of firms, and the financial aspects of the R&D process.

'The Logic of Vertical Restraints' was discussed by Patrick Rey (ENSAE), presenting research also done jointly with Jean Tirole. They sought to assess the welfare costs and benefits of agreements between a monopoly supplier and the distributors of its products. Such agreements can take the form of quotas, exclusive territories, franchises and minimum resale prices. Under the assumption of perfect information a variety of market structures yielded the same profits to the monopolist. Suppose access to information is asymmetric, however, as may occur if the distributors have better knowledge of demand conditions and distribution costs. The outcome in this situation will depend on the degree of risk aversion of the distributors. There are cases which would appear to justify government intervention to exclude some types of agreements, Rey concluded.

The remaining papers in the sessions on industrial policy, industrial structure and trade emphasised applied work. John Vickers (Nuffield College, Oxford) discussed 'Privatization'. He focussed on the case of natural monopolies, although clear examples of this, he argued, were less common than had previously been thought. Privatization involved issues both of ownership and of market structure. The efficiency gains from the transfer of ownership to private hands were uncertain, but there could be large gains from liberalization and opening up markets to competition. Once ownership was transferred, however, liberalization would be harder to achieve. Yet the data needed to guide liberalization were often not available until privatization had been effected. Vickers illustrated these points using the example of British Telecom and outlined specific policy recommendations regarding the resale of transmission capacity, the licencing of other public networks, other cable companies, the regulation of tariffs, and the role and powers of the Office of Telecommunication (the new regulatory body).

Sir Adam Ridley (Cabinet Office) discussed selected problems of 'Industrial Policy in the UK' in his presentation to the Colloquium. Policies toward state enterprises had evidently stressed denationalization (privatization), but there were important issues which had not been resolved. They included: the extent of unavoidable natural monopoly, on which belated and still insufficient empirical work seemed to support Vickers's view; the appropriate regulatory structure for a privatized firm with elements of natural monopoly, especially with regard to pricing rules, cross-subsidization, and entry barriers; and the desirable structure for distribution, particularly questions of franchising and regional decentralization. In dealing with the private sector, Ridley noted that, although in principle the present UK government did not wish to intervene, it had not renounced industrial policy altogether. Their objective was a shift of emphasis away from declining industries towards support for new technology; but steel, textiles, agriculture, and the motor industry were examples where involvement was still important. Ridley maintained that research to date contained few useful lessons for policy-makers on the elimination of fiscal and legal obstacles to entrepreneurship. Finally, Ridley noted that the government now accepted that it might be possible to make better use of the #5 billion it spent on R&D and had put in hand a scrutiny of the current allocation; but he recognized that this was as much a political as an economic question.

In the discussion, several of the academic economists argued that there was research available which was relevant and yet was ignored or not properly applied. They suggested that until it could be shown that such research could actually influence policy and that funds would be forthcoming for detailed empirical work, it would be difficult to stimulate academic interest in such applied topics. Transport (notably buses), textiles (the MFA) and agriculture (the CAP) were all cited as examples. Policy- makers as well as the press seemed to focus excessively on the macroeconomic policy issues associated with fiscal and monetary policy.

David Ulph (Bristol and CEPR) described two new research projects concerned with major industrial policy issues: the differences between the abilities of existing firms and of new entrants to spot profitable opportunities; the ability of existing firms to adapt to changing factor- and product-market conditions; and the trade-off between the flexibility needed for adaptation and the commitment needed for successful investment and strategic behaviour toward actual and potential competitors. The projects dealt specifically with the emergence of new products, bringing together research on product differentiation and literature on innovation. They also dealt with labour market barriers to industrial change, seeking to apply the insights of implicit contract theory.

'Competitiveness of the Industrial Structure and International Specialization' was discussed by Jacques Mistral (ENSAE). He considered the sources of competitiveness and their impact on the balance of trade. Much of the empirical analysis dealt wtih long-run phenomena, illuminated by data covering over a century. Changes in openness and in technological leadership were related to external disequilibria and structural stability.

Alasdair Smith (Sussex and CEPR) outlined the 'Computable General Equilibrium (CGE) Model of the European Economy' which he proposed to build with Tony Venables (Sussex and CEPR). Venables elaborated some of the principles underlying the model in his talk on 'Trade under Imperfect Competition and Strategic Behaviour' (see his article in CEPR Bulletin No. 12). Smith and Venables plan to incorporate significant details of industrial organization and international trade into a multi-sector model of the EEC economies. The key features of increasing returns to scale, product differentiation and imperfect competition will help the model to explain intra-industry trade and to analyse trade and industrial policies. Smith and Venables will simulate the effects of specific policy measures, including tariff changes made by a single country and by several acting simultaneously, regional and competition policies, and the consequences of exogenous shifts in technology. Venables sketched a theoretical two-country model with increasing returns and free entry, in which he showed the effects of trade and the consequences of both tariff policies and industry subsidies.

The final talk was given by David Young (NEDO), on 'Trade Patterns and Industrial Change' in the United Kingdom. This was based on extensive empirical work done in NEDO on sectoral trade performance over long periods, and much of the discussion complemented the presentation by Mistral. Young also considered alternative policies for restructuring industry, and in particular, subsidies to R&D.

Other participants in the colloquium included Francois Bourguignon (EHESS), Pierre-Andre Chiappori (EHESS), and Richard Portes (Birkbeck, EHESS, and CEPR). All participants agreed that the Colloquium had been extremely valuable in bringing together closely related work from the two countries. Various possibilities for collaboration and research visits were explored, some of which have already been followed up. It was particularly important that the topics combined theory, empirical work and policy analysis in a field which is central not only to policy and political debate in each of the two countries, but also to the economic relations between them.