Competitive strategies, commercial organization and the growth of marketing services : Europe : 19th and 20th centuries

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Valentina Romei

Tlicsis subm ittal for assessment with a view to obtaining the degree o f D octor in History and Civilisation

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European U niversity Institute

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BIBLIOTECA

EU RO PEA N UNIVERSITY IN ST IT U T E D ep artm en t o f H istory and Civilization

C O M P E T IT IV E ST R A T EG IE S, C O M M ER C IA L O RGA N IZA TIO N AND TH E G R O W TH O F M A R K ETIN G SERV ICES

EU R O PE

19th an d 20th centuries

V alentina Romei

Thesis subm itted for

assessm ent %vith a view to obtaining

the degree o f Doctor fro m the E uropean University In stitu te

Examining jury:

Prof.: Giovanni Federico (EUI) supervisor Prof.: Bartolomé Yun Casalilla (EUI) Prof.: Marc Casson (University o f Reading) Prof.: Albert Carreras (Pompeu Fabra University)

LIB

940. 28 -B

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Competitive Strategies, Commercial Organizaiion and the Growth o f Marketing Services Content 5 Content:... List of Tables... 10 List o f Graphs... 14 List of Figures... 15 P reface... 16 1. Introduction... 16

1.1 Aims and Structure o f the Thesis ... 18

1.2 Definition of Critical Terms And C o n ce p ts... 23

1.3 Literature R ev iew ... 33

1.4 Aims in D e ta il... 57

2. In Theory ... 66

2.1 Introduction... 67

2.2 Toward A Theoretical Interpretation... 69

2.3 In Theory: Some Specifications... 84

2.3.1 Traditional Marketing O rganization... 84

2.3.2 Vertical Integration... 89

2.3.3 The Role o f C onsum ers... 92 2.3.4 Monopolistic Competition: Monopolies, Oligopolies, 94

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Competitive Strategies, Commercial Orgojiization and the Growth o f Marketing Serx’ices

Contení

PART O N E

A B usiness Analysis O f M arketing Services

3 Diffusion of m arketing services in E u r o p e ... 100

M eth o d o lo g y ... 100

Engines of C h an g e ... 101

3 3

T h e Role of Innovations: Quality, Quantity, 103 Appearance, Perform ance, O th ers... 3.4 Time Period o f the diffusion o f m arketing se r v ic e ... 134

L uxury Goods in The F irst Half Of The Century ... 141

3.4.2 D iffusion of ‘M odem ’ Form s of Marketing Organization (1 8 4 0 -1 8 8 0 )... 147

3.4.3 C onsum er Goods Producers Adopt M odem Marketing Techniques (1870-O nw ard)... 154

3.5 Differences by Type Of P r o d u ct... 166

3.5.1 Final/intermediate g o o d s ... 167

3.5.2 Forward/Backward vertical integration... 170

Search/Convenience g o o d s ... 180

3.6 National D ifferences and M arket C haracteristics... . 193

3.6.1 D ifferent Timing: Britain as the Innovator... 194

3.6.2 B ritish Entrepreneurs in Southern European Markets .. 196

3.6.3 Entrepreneurs Learning From Innovators... 198

3.6.4 D ifferent Patterns of Evolution: Indirect to Direct in Britain, Local to International in Southern C ountries... 199

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Competitive Strategies, Commercia! Organization and the Growth o f Marketing Services

Content

3.7 The Externalization o f M arketing A ctivities... 215

3.7.1 Timing the Vertical Disintegration o f Marketing Services... 217

3.7.2 The Case o f A dvertising... 222

3.8 Core- Activities and Contracted-Out Services... 227

3.9 Conclusions: The Case o f The Bottled Water In d u stry ... 233

PART TWO Quantitative Analyses o f Intermediate services Introduction to the Quantitative Analyses of Intermediate Services 252 4 An Employment Analysis of Marketing Services... 268

Introduction... 269

Sources... 269

A im s... 271

Classifications... 272

A General P ic tu re... 276

The Growth of Intermediate Services... 280

In-House Intermediate Services... 298

C onclusions... 305

5 An Inter-Industry Analysis o f Intermediate S erv ices... 307

Introduction... 308

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Competitive Strategies, Commercial Organization and the Growth of Marketing Services Canteri

5.3 A L ong T e rm Analysis: F ran ce, G erm any, Italy, th e U K And

The USA, 1900-1970... 31:

5.3.1 ^ u jg Qf Services As Intermediate In p u ts ... 313

5.3.2 The Predominance o f ‘‘Producer Services*’ Over “ Distributive Services” ... 31 (

5.3.3 A More Intensive Use of Services in Light As Opposed to Heavy In d u strie s... 313

5.3.4 Further O b serv atio n s... 319

5.4 A M ed iu m -T e rm A nalysis: F ran c e , G erm an y , Italy, th e UK and the USA, 1 9 7 0 -1 9 9 0 ... 322

5

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4.1

Services Sell Progressively More To Producers Than ' To Final C o n su m ers... 322

5.4.2 W ho Buys S e rv ic e s?... 325

5-4.3 Manufacturing Producers Use Services... 327

5.4.4 National C a s e s ... 331 C onclusions... 335 6 C onclusions... 339 ^ W hat is left o u t ... 340 C onclusions... 343 Further R esearches... 349 B IB LIO G R A PH Y ... 351

APPENDIX A Employment in Service A ctivities... 397

APPENDIX B Categories o f Service Industries... 399

APPENDIX C Employment by Occupation and In d u stry ... 412

APPENDIX D Classifications in Input-Output A n aly sis... 494 7

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Content

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Sendees Cont<

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Content

List Of Tables

1.1 Characteristics of tangible and intangible activities 37 1.2 Employment in transaction-related occupations, 1910-1970 47

(percentage of total employment).

1.3 Determinants of services growth 57

2.1 Schematic representation o f the long-term transformation in the 70 organization of marketing activities.

4.1 Labour productivity growth in service activities. (USA, 1972- 259 1985; growth rate o f value added per full-time equivalent

employee by branch o f service activity)

4.2 Growth o f expenditure for intermediate services and growth of 260 expenditure for intermediate services corrected for the

productivity growth rate in service activities, (manufacturing industries, USA 1972-1985)

4.3 Expenditure for intermediate services without the effects of 263 productivity differentials (USA, 1972-1985)

4.4 Indirect net taxes on service industries. (Percentage of gross 266 output by industry. UK, France, Germany, 1968-1990)

4.5 Classification of Service Activities 273

4.6 Employment in service activities (Germany, Italy and the USA, 276 1960s and 1999, percentage o f service professions in total

active population)

4.7 Employment in intermediate service activities (1920s- 1970s, 277 France, Germany, Italy, Spain and the U K , % o f total active

population)

4.8 Employment in final service activities (1920s-1970s, France, 278 Germany, Italy, Spain and the U K , % of total active

population)

4.9 Female employment in intermediate and final services (France, 280 Norway and Spain 1911-1920; Percentage o f female active

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

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population).

4.10 Em ployment in intermediate service activities (1920s- 1980s, 2 8 1 France, Germany, Greece, Italy, Spain, Portugal, Turkey and

the UK , % of total active population)

4.11 Em ployment in advertising activities (absolute numbers and per 2 8 3 thousand o f total active population, France, Italy, England

&W ales).

4.12 Em ploym ent in Commercial intermediation activities (England 2 8 7 and W ales, 1871-1911, absolute numbers and per thousand of

t.a.p.)

4.13 Em ploym ent in intermediate industries. (England and Wales, 2 8 7 1911, absolute numbers and per thousand o f t.a.p.)

4.14 Em ploym ent in jobs related to trade intermediation by gender. 2 8 8 (England and Wales, 1951, absolute numbers and per thousand

o f t.a.p,). j

i 4.15 Em ploym ent in commercial intermediation activities (France, 2 8 9 ^

1896-1911, absolute numbers and per thousand of total active population)

4.16 Em ploym ent in commercial intermediation activities (France, 2 8 9 1931, absolute numbers and per thousand of total active

population)

4.17 Em ploym ent in Commercial intermediation activities (France, 290 1954, absolute numbers and per thousand o f total active

population)

4.18 Em ploym ent in commercial intermediation activities (Italy, 291 1931, absolute numbers and per thousand o f total active

population)

4.19 Em ploym ent in commercial intermediation activities (Spain, 292 1950, absolute numbers and per thousand o f total active

population)

4.20 Em ploym ent in communication Services (France, Germany, 293

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Competitive Strategies. Commercial Organization and the Growth o f Marketing Services

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Greece, Italy, Spain, Portugal, Turkey and the UK, per thousand of total active population).

4.21 Employment in transport (France, Germany, Greece, Italy, 295 Spain, Portugal, Turkey and the UK, percentage o f total active population).

4.22 Employment in financial services (France, Germany, Greece, 296 Italy, Spain, Portugal, Turkey and the UK, per thousand of total active population).

4.23 Employment in insurance services (France, Germany, Greece, 297 Italy, Spain, Portugal, Turkey and the UK, per thousand of total active population).

4.24 “Professional, technical and related works“(Germany, Italy, 299 Spain, the UK and the USA; 1950s-2000; percentage of total employment)

4.25 Employment annual growth rate of “Professional, technical and 299 related works” by industry (Germany, Italy, Spain, the UK and the USA; 1950s-2000; annual growth rate of percentage of “professional, technical and related workers” in total active population).

4.26 “Professional, technical and related works” by industry 300 (Germany, Italy, Spain, the UK and the USA; percentage of total employment in each industry).

4.27 “Professional, technical and related works” in manufacturing 301 industries (Germany, Italy, Spain, the UK and the USA; 1950s- 2000; percentage o f total employment in manufacturing industries).

4.28 “Production and Related Workers, Transport Equipment 302 Operators and Labourers” in manufacturing industries (Germany, Italy, Spain, the UK and the USA; percentage of total employment in manufacturing industries).

4.29 “Sales workers” by industry (Germany, Italy, Spain, the UK 303

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Service. Cot

and the USA; percentage of total employment in each industry). 4.30 “Service workers” by industry (Germany, Italy, Spain, the UK 3

and the USA; percentage o f total employment in each industry). 5.1 Intermediate services. (Percentage of service input/ total input. 3

France, Germany, Italy, UK and USA, 1911-1970)

5.2 Intermediate services output. (Percentage service output/ total 3: output. France, Germany, Italy, the UK and the USA, 1911-

1970).

5.3 Intermediate transport services. (Percentage of transport in total 3 1 service input. France, Germany, Italy, and the USA, 1959- 1970)

5.4 Intermediate services in “food and beverages” and “iron and 311 steel” (Percentage services input/ total input, U .S.A. France, UK, Italy, Germany. 1911-1972)

5.5 Intensity in the use of intermediate services by country, 320 industry. ((Intermediate services by country (percentage service input/ total input) and (intermediate services by country/ international average). Germany, Italy, USA, 1959))

5.6 Service-intensive industries, (percentage o f service input in 328 total input, France, Germany, the UK and the USA, 1970-

1990)

5.7 Low service-intensive industries, (percentage of service input 330 in total input, France, Germany, the UK and the USA, 1970-

1990).

5.8 Intermediate services by service activity, (percentage of 331 intermediate services in total service output by service activity,

1970s-1990s, Germany, France, the UK and the USA).

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4.1 5.1 5.2 5.3 5.4 5.5 281 323 324

Competitive Strategies, Commerciai Organization and the Growth o f Marketing Services Content

List O f Graphs

Composition of intermediate service activities (1920s- 1970s, France, Germany, Italy, Spain, and the UK)

Absolute annual growth rate o f intermediate service output by service industry. (Annual growth rate o f intermediate output/total output by industry, arithmetic average France, the UK and the USA, 1970-1990)

Intennediate service output by service industry. (Percentage of output sold to other producers in total services’ output by industry, 1970s-1990s; arithmetic average, France, the UK and the USA).

Service input by sector (percentage of service input in total input by sector and by service industry, 1970, arithmetic average, France, the UK and the USA).

Service input by industry and by country. (Percentage of service input in total input by industry. France, Germany, Italy, the UK and the USA)

Annual growth rate o f intermediate services by industry and by country (annual growth rate of the share of intermediate services in total input by industry. France, Germany, the UK and the USA).

326

333

334

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

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List O f Figures

1.1

Structure o f the thesis 30

1,2

1.3 1.4

2.1

2.2

3.1 4.1

Intermediate services and its com ponents 34

Literature review 35

Imperfect and monopolistic competition 37

Schematic representation o f traditional marketing organizations 85 Transform ation from “traditional” to “modem” forms of 87 marketing organization

The changing boundaries o f the firm 229

Schematic representation o f intermediate (broken line), 275 marketing (steady line) and business services (dotted line).

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introduction

PREFACE

My research question originated from the contrast between my everyday experience and the subjects which seemed to be most studied in the literature o f economic and business history. Whereas I often came across articles and books about innovations and advantages related to production processes, considered as elements that made the fortunes of firms and of countries, I was surrounded by consumer goods, retail shops, and services in which image and sales strategies played a major role for the competitiveness of the business. I thus became interested in the activities that made possible for producers to create such images, to differentiate their goods and services from those o f many firms that produced similar goods. I looked at those activities from different perspectives because I wanted to get close to their understanding, and as soon as in my research a road came to an end, I started walking a new pathway in the hope to get even closer. The outcome is a composition of pictures from different point of view that once give a very detailed description of, for example the advent o f marketing services in the various industries, but that it also try to give a macroeconomic measure of their evolution.

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introduction

C H APTER 1

IN TRO D U C TIO N

it

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introduction

U Aims and structure o f the thesis

The main aim o f my thesis is to study the evolution o f marketing services through different perspectives. In order to do that, I looked at their emergence, at their impact in the business organization and at their quantitative growth.

The aim o f my thesis is thus that of proposing an interpretation of the evolution o f marketing services as resulting from a transformation in competitive strategies, of studying the factors that fostered or slowed down the adoption of marketing activities, of understanding the determinants of the variants in the process of evolution of marketing choices. Moreover, m y thesis makes an attempt of looking at the quantitative evolution of marketing services in a cross-countries perspective.

The multi approaches of my thesis comes out of an initial project of measuring the impact of the changing role o f marketing activities in the overall growth of services. The idea was to study the percentage of services “explained” by the increase of services as resulting from the adoption of new marketing strategies. Such measurement resulted to be impossible, at least in a very long term and cross- countries perspective. I then tried to establish a link between the evolution of marketing activities and the structural change, but, again, the problems of definition, o f classification and additional problems related to the comparative perspective did not lead me to stringent conclusions. I did not abandon the idea of studying the impact of the services, and indeed I do think that my research helps me to go in that direction since it made possible to study the evolution o f marketing services, but I reckoned that in order to establish a cause-effect relationship with stringent argumentation or in order to assess percentage of growth explained by the changes in marketing services I need to limit my analysis in time or space, and to adopt different methodologies.

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Competitive Strategies, Commercial Organization and the Growth of Marketing Ser\>ices

Chapter One: Introduction

The evolution o f m arketing strategies and services is analyzed into a context o f econom ic, social and even cultural conditions that favored an increase in the use o f m arketing services (in term s o f diffusion and intensity) in “mature economies” . Rising living standards, b etter transport and communication infrastructures, higher levels o f urbanization, all favored the possibilities o f differentiating goods through branding or through different production lines. Thus, the emergence o f conditions, typical o f advanced econom ies, that favored the use of marketing activities are the ultim ate reason for the transformation o f the employment and input structure o f advanced economies, but they are not investigated in a systematic way here. The more urbanized, rich, and larg e market, for example, is considered as a reason for the early appearance o f m arketing activities in Britain, but there is no attempt to qualitatively and quantitatively investigate the relationship between economic, social and cultural conditions and th e existence and diffusion of marketing services.

E ach of the three key concepts in the title o f my thesis, namely competitive strategies, commercial organization and the growth o f marketing services are broad and general themes that are largely discussed and investigated in different branches of studies.

On the contrary, the relationship between these factors has not been discussed very m uch in the literature. M y thesis studies a specific category of services, namely m arketing services by looking at them from different perspectives. First of all. it looks at their advent and diffusion in relation w ith the transformation o f competitive strategies in Europe. Secondly, it looks at the way in which they were organized and finally it makes attempts o f measuring their importance in the economic structure o f European economies.

T he different perspectives give a multidimensional view o f the same phenomenon and open the way to a more comprehensive understanding of the grow th o f a progressively bigger part of service activities.

In Chapter one I have described the aims, structure and key concepts of m y thesis. The chapter also presents a review of the literature that tackled, at different

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Competitive Strategies, Commercial Organization and the Growth of Marketing Services

Chapter One: Introduction

levels, one or more aspects of key concepts used for my research. The implications of having to deal with different perspectives and methodologies become clear in this chapter. The use of different levels, and thus of different methodologies and definitions, implies that concepts matured within certain branches of studies were used also in different contexts, but unfortunately they could not always be easily transferred among analyses with different methodologies. In particular, the various definitions of marketing could not really be applied to the identification of competitive strategies, and were not useful for an historical perspective. In the end, I moved for a new definition of marketing activities. Compared to the available ones, my definition o f marketing activities has the advantage of proposing a theoretically clear-cut criterion to identify marketing activities from productive ones. In addition, it is based on a functional criterion and, as such, it can be more easily used in a long­ term analysis. The chapter also explains the relationship between marketing services and Intermediate and Business services, which are both defined according to the sources and tools with which they will be studied.

Chapter two describes the theoretical framework on which is built my interpretation o f the advent of marketing services as resulting from “new” types of competitive strategies. In order to present an interpretative model, chapter two describes the process o f transformation in schematic terms. At the end of the chapter, historical complexity w ith some of its variants, differences, and alternative patterns is taken into account.

The results o f the analysis are proposed in two different parts, namely part one is the qualitative part and part two is the quantitative section. We could think of the two parts as of two different pictures. The quantitative part is aimed at giving a satellite picture to look at macroeconomic characteristics of the evolution of marketing activities, while the qualitative part is like a portrait or even a radiography that is aimed at looking at the internal functioning system. Since the qualitative analysis has also the aim of studying the "advent"’ of marketing activities, while the quantitative

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introductiot

analysis is concentrated on their more recent phases of evolution, the thesis goes through a detailed business analysis and then raises the perspective at a macro level.

The first part, namely chapter three is essentially a chapter of business history. Using various case studies, the chapter tries to investigate the first part of the process, that is, the early diffusion o f com petitive strategies based on product differentiation and the effects on the business structure. Far from identifying “rules” , it rather deduces characteristics of the transform ation of both competitive strategies and business organization. It begins by studying the factors that fostered the transformation of the commercial organization. W hereas the diffusion of competitive strategies based on product differentiation (otherwise labelled as “monopolistic competitive behaviors” ) is considered to be exogenous since it directly results from economic development because of the effects on the purchasing power of the population and because o f the reduction of transportation and communication costs, the transformation of the commercial organization is reckoned to be rooted elsewhere. Among the factors that fostered the transformation o f the commercial organization there is innovation. Both product innovation and innovation that affected the way goods w ere marketed increased the possibilities o f friction between producers and traditional marketing actors. W ithin the theoretical framework analyzed in chapter two, chapter three provides evidence of the effects of product, national and firm characteristics on the different timing of the transformation o f competitive strategies and o f business organization. Luxury goods turn out to be among the first for w hich new competitive strategies were adopted. Similarly, English producers were the ones who re-structured their business organization earlier and m ore radically toward the adoption o f new marketing methods.

Chapter three ends w ith some considerations on the process o f business disintegration, analyzing in particular, the case o f advertising. For the concluding remarks the case o f the bottled water industry is taken into consideration. Indeed, through the study o f the historical evolution of this industry it was possible to give evidence of the im portance of marketing activities in a new competitive environment. It was also a chance to show the complexity of the different types o f

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Sendees

Chapter One: Introduction

commercial organization and competitive strategies among firms of different countries and with different characteristics. It also displayed the variety of possible solutions within the same pattern o f organizational evolution.

The perspective changes in the second part of the thesis, namely the quantitative analysis. With chapters four and five we look at marketing services in the structure of various European economies. Marketing services do not constitute an industrial category, at least not with my definition of marketing services, that can be used across countries and in the long term. I thus looked at them using a larger category, that of Intermediate services. The relationship between the two categories is explained and described further on.

The exposition of results is preceded by consideration of the main objections to similar quantitative studies. They are reviewed before my own analysis because some of them have become part of the mainstream interpretation o f the growth o f the service sector. Thus, it was important to see how they affected, if they did, my analysis in order to support the choice o f methodology and sources that I adopted. The introduction to chapter four analyses the main counter-interpretations of services growth, such as the identification of service activities as those for which productivity growth is slower, and the idea of the growth of services as effect of a different allocation of activities.

The first part of the quantitative analysis studies the structural evolution of employment in intermediate service activities. The employment analysis studies the main European countries from the beginning o f the twentieth century to about the 1980s. The category o f intermediate services is further divided into the main activities that compose it, namely business, financial, real estate services, transport and communication. The aim is to study the employment trends internal to the category of intermediate services and, in particular, to observe the composition of business services. This sub-sector of service activities sometimes is similar to a black box where various types of activities are classified. Since its content changes among countries and in the long term, a detailed analysis of the activities classified under the

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CompetUive Strategies, Commercial Organizjation and the Growth of Marketing Services Chapter One: ¡ntroductk

heading of business services is useful in order to understand how , and by whor certain types o f functions were perform ed at different times. T he employmei analysis shows a significant growth o f interm ediate services, in particular of th activities more integrated with the production system, and it also gives evidence c the effects of the transformation of the com m ercial organization.

The second part o f the quantitative analysis, that is chapter five, takes intt consideration the interrelationship between sectors through the analysis of the inpu output tables. The chapter studies both the service-industrialization and th( integration of services with the production process. The first concept refers to the increasing use o f intermediate services acquired as productive inputs. The second refers to the increasing share of producers (rather than final consumers) as customers o f service industries. T he analysis covers the main European countries and the U nited States o f A m erica. The time period is the same as for the employment analysis, that is, from the early twentieth century to about the 1980s,

In the last chapter, the results of the micro and macro approaches of part one and tw o are lead me to draw some stylized facts o f the evolution of marketing services in Europe.

1.2

D efinition O f Critical Terms A n d Concepts

The key words o f the research, as they appear in the title and the aims of the study described above, are marketing, com petitive strategy, and services. In order to understand their interrelation, they have to be defined first. The effort of providing a definition is functional to the clearness o f the study. Thus the aim is to find useful conceptual tools for a m ore precise analysis o f the subject rather than to contribute to the discussion on the definition of either term, o r in particular of marketing activities.

MARKETING is a very difficult term to define and to study. T he Encyclopedia Britannica defines m arketing as “the sum of activities involved in directing the flow

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introduction

of goods and services from producers to consumers”. Tedlow (1990, 5) wrote that marketing is “difficult to discuss because it is difficult to define” , but then he defines it as “the interplay between com pany and customers, within the context of competition” (Tedlow, 1993). Marketing activities have open borders with the other service activities, but also with production-related functions since goods have to be adapted to customers’ needs and tastes in order to be sold. The efforts to conceive, design and realize a good that responds to consumers’ preferences are part of the marketing function, but they are difficult to distinguish from manufacturing activities.

John Hauser (1980) defines marketing as a problem of “how can we achieve research and managerial goals through understanding and influencing the exchange process”, while Mark Casson (1993) identified four main aspects o f marketing: those aimed at identifying new opportunities, such as market research; those aimed at changing the curve o f demand such as promotion; those aimed at making the required contacts and arrangements with customers, such as transaction managements and finally the activities that physically secure the delivery to final destinations,

Corley (1993) tackles the difficulties in studying marketing with an historical perspective starting from the problems in finding a definition that can be valid in the long term. The many functions of marketing, described from the 1950s onward as the “marketing mix” (Borden, 1950), have the goal of analyzing, planning, and controlling the process o f matching human, financial and physical resources with the wants of consumers (Christopher, 1980). In the 1960s McCarthy grouped the various activities in four groups, labeled the four Ps, namely Product, Price, Place and Promotion (McCarthy, 1960; Doyle, 1984; Christopher, 1980). The definition of marketing overlaps and intersects with the concept of “Brand” considered as a combination of elements such as name, price, packaging, advertising campaign, and the nature of the product itself. In 1957 John McKitterick, president of General Electric, introduced the “marketing concept”, a philosophy of business which is “customer-oriented, integrated and profit-oriented”. The marketing concept combines four elements: a market focus, a customer orientation, coordinated marketing and a

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Service

Chapter One: Imrodui

goal of profitability. K otler (2003), now the authority in marketing managen distinguishes between two definitions o f marketing, namely the social and managerial definition. According to the social definition marketing is “a soci process by which individuals and groups obtain what they need and want thro creating, offering and freely exchanging products and services o f value with othi (p.9). On the contrary, from the managerial point of view marketing is the ‘‘art ; science of choosing target markets and getting, keeping, and growing custom through creating, delivering and communicating superior customer value” (p.9)

Despite the many definitions and even classifications the issue is still open. T lack of an agreement on definitions and classifications o f marketing activities proved by the fact that almost every history of marketing began by an attempt giving a definition or by discussing the difficulties of exactly identifying the subjec Ackrill (1993, 150) began his history of British marketing by saying “there is r agreement on a definition of marketing. A shelf-full of textbooks on the subjei produces a shelf-full o f differences”. The definition seems particularly problemati fo r historians because “marketing is different in different settings” . Marketing grai; in the middle ages was very different from marketing software nowadays. F or ai historical perspective, a definition of marketing activities should, thus, be able U catch its evolutionary process (Tedlow, Jones, 1993).

The various definitions agree in recognizing the importance of m arketing functions in the creation o f bridges between producers and final consumers. B ut distinguishing between activities which are responsible or not for establishing those bridges is much more difficult. Is an engineer involved in increasing noise isolation in cars doing something related only to production or also to marketing functions? W ould the situation change if he were involved in allocating design accessories inside the car?

Lacking a clear-cut criterion, I chose to adopt a broad definition o f marketing that is indebted to management literature, and the literature on competition.

In order to define the criterion on which I distinguished some activities as having m arketing functions from the others which did not, a few concepts on competitive

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Competitive Strategies, Commercial Organization and the Growth o f Marketing Services

Chapter One: Introduction

advantages and on the economic meaning of specific marketing techniques have to be introduced. The key points for reaching, in some ways, a very simple criterion for identifying marketing activities, deals with different aspects o f market transactions. The first one relates to the nature of competitive strategies. Competitive strategies have been studied and classified in many different ways, but for the present purpose the definition given by Porter (1985, 1990) seems the most useful. He distinguished two main types o f competitive strategies, namely cost leadership and product differentiation. A firm pursues a cost leadership strategy when it “sets out to become the low'Cost producer in its industry”. On the contrary, a firm purses a differentiation strategy when it “seeks to be unique in its industry along some dimensions that are widely valued by buyers” (Porter, 1985, 12-14).

Ideally, a strategy of differentiation is what makes goods, otherwise perceived as perfectly homogeneous, be perceived as different from each other. For most of consumers, all flour types “00”, for example, are perfectly homogeneous goods, but if a producer packages it in a more appealing way, advertises it and establishes a more efficient organization for its distribution, flour type “00” o f that producer will be perceived as different by consumers. Then, in theory marketing activities are those that make possible to create perceived differences among goods that were otherwise perceived as homogeneous. T o make the concept clearer, we could consider the example o f wine (or any other good) and say that marketing activities are those that make consumers consider as different wines that they considered as

perfectly homogeneous in a blind testing. ^

Identifying activities that make goods be perceived as different is conceptually easy in all cases in which for most of consumers, goods were otherwise homogeneous (as in the case of flour type “00”, but also in the cases of pharmaceuticals with specific active principles, and in the cases of diamonds, silver, and gold with the same carats). In the case in which the similarities among goods of different producers are not clearly identifiable, the distinction between marketing and other activities is less easy to establish.

The concept of differentiation as a strategy for competition goes back to the literature on the economic meaning of creating differentiated goods. The analysis of

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Chapter One: Introducti

goods that do not have perfect substitutes on the market is studied within the bran of theory of microeconomics o f monopolistic competition. The basic idea is tl differentiation gives the producer a limited monopolistic power. The more goods a perceived as different by consumers, the more firm s benefit from their monopolist power.

The definition of marketing services developed for my thesis is embedded in boi the idea o f creating competitive advantages through differentiation and in the idea c exploiting and benefiting from monopolistic power, even if limited to a segment c the market. In other words, in my thesis

M arketing indicates all activities that manage resources in order to create and exploit markets barriers

to com petition through product for service) identification and differentiation.

That means that all activities used in order to differentiate and to exploit th e advantages of differentiation, rather than to lower the costs of goods and services, are part o f marketing activities.

Adopting a unique econom ic functional criterion to define marketing activities has pros and cons. Among the pros is the fact that it offers larger possibilities w ith regard to long-term perspective. Definitions described above also adopt functional criteria in some cases, but functions are defined according to managerial rather than economic factors. M anagerial functions are based and deduced from the structures o f the business organization that, unlike economic factors, change over time. But this is also a quite unusual and rather “slippery” definition. Indeed, when a firm pursues a differentiation strategy, it is difficult to establish w hich activities mostly have the aim of creating and exploiting differentiation from those which do not. Moreover, differentiation is an umbrella definition under w hich, according to the specifications made by Porter (1985) there are very different activities in various parts o f the value chain. The problem o f the various factors, at various levels that can create product

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differentiation is marginal to the problem of distinguishing the “aim” o f each activity for two main reasons. First of all, because what is important is the idea of giving the perception of differentiation of goods, rather than the way in which this aim is met. Secondly, because differentiation, in order to be perceived as such, requires important investments and innovation and thus the relevant activities aimed at it can be confined to a group o f upstream functions, such as projecting and designing, and downstream functions, such as advertising and delivering.

The problem o f creating categories of activities is not confined to the distinction made in types of competition, but it also concerns the type o f activity itself. It is true, for example, that varnishing a car in metallic violet is a way of producing differentiated goods, but not all activities involved in the varnishing o f the car can be considered as marketing activities. In other words, while the person that carried out market research and discovered that metallic violet would meet the favor of costumers and the advertisers who promoted the car belongs to the category of marketing activities, the person who actually varnished it should be considered as a production-related employee. This is true also at other levels o f the production process. Packaging, for example, is a typical case of marketing functions because it makes the good that is been packaged different. But not all activities related to packaging are marketing activities. Those involved with the management of resources dealing with the production o f a packaged good are to be considered as marketing activities. On the contrary, those that actually make the boxes and cans are not. Thus, the distinction between service and manufacturing activities is a way of further distinguishing marketing from other activities. Marketing activities are thus marketing services.

The distinction between productive and service activities is useful to further define marketing activities, but it is only a simplification that needs clarifications. As not all activities involved in the production o f “differentiation” are marketing activities, not all services are marketing services.

Similarly to a car producer, a firm in the hotel industry uses services in order to create and exploit differentiation. The supply o f accommodation services, just as for the production o f cars, does not belong to marketing services. In this case all

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Chapter One: Introduction

activities are service activities, but according to their aim, they have to be labeled as m arketing services or hotel activities.

I stressed that marketing activities are all those functions that manage resources w ith the aim of creating and exploiting a condition of monopolistic competition. T h e tw o aim s, namely creating and exploiting, are intrinsically different, even i f som etim es they are difficult to distinguish from each other. The difference can b e better understood if a monopolist firm is taken into consideration. A monopolist firm , for exam ple Trenitalia^ the Italian railway agency, does not need to create barriers to prevent competitors to enter, but it uses various marketing services to fully exploit its m onopolistic position. M arket research has helped it to organize timetables and ty p e o f services; other service firm s developed a direct IT service for it and a large use o f advertising to inform custom ers about special services and promotions, with th e com m on aim of shifting the demand curve.

In other cases the distinction between creating and exploiting monopolistic pow er is less easy to catch since m ost of the activities play a role both in creating entry barriers o r moving the dem and curve upward.

Studying marketing activities

H aving established what marketing activities are in principle, it remains to b e defined how they can be studied in practice. The economic functional criterion o f classification of marketing activities makes it possible to study marketing activities as a unique sub-sector and not as a list of different activities. Nevertheless it is a sub­ sector that cannot be really caught by statistics because it does not correspond to any o f the international classifications o f either occupation or industry. Thus, apart from qualitative analyses, marketing activities have to be studied by analyzing categories that are related in some ways to them.

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Quantitative analyses on marketing services are thus developed using two other categories namely Intermediate and Business Services. They constitute the upper bound and the lower bound of marketing activities respectively. The idea is that by studying both the branch o f activities that incorporates marketing services and those that are incorporated in them, I would be able to indicate the main characteristics of the evolution of marketing services.

INTERMEDIATE SERVICES indicate all services that are used by producers. This means that intermediate services are all types of services acquired by other producers as intermediate inputs independently o f the characteristics of the service industry and of the frequency of use. If a car producer pays an advertising agency to promote its car and it occasionally refunds the personnel of the firm for their restaurant and taxi bills, all these expenditures will be accounted as costs for intermediate services. It has to be noticed that is not the restaurant itself that is considered as an intermediate service, but it is just the restaurant service that the personnel of the car firm has paid for.

Figure 1.2 Intermediate services and its components

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/ Chapter One: Introduction

The advertising agency, restaurants and taxis of the above-mentioned exam ple contribute to the total amount o f intermediate services, but they differ in the way th e y interact with the production process. W ithin intermediate services, some activities sell m ost of their output to other producers as opposed to final consumers, as in th e case o f advertising agencies. On the contrary, other categories of service industries sell their output primarily to final consumers, as in the case o f restaurants. Service activities that mostly sell to other producers are labeled as PRODUCER SERV ICES^ The share o f producer services in total intermediate services varies across countries and time, but the analysis in chapter five shows that in all countries considered here it has been increasing over the whole period.

In other words, intermediate services are composed, among other services, of th e activities that in the International Standard Industrial classification revision 2 are classified in sections 7 (Transport and Communication) and 8 (Financing, Insurance, R eal Estate and Business Services).

BUSINESS SERVICES, more than other categories overlaps w ith marketing activities even if the former is internal to the latter. Business services are labelled as category 832 of the International Standard Industrial classification revision 2 and they are further divided in six types of activities (namely legal services; accounting, auditing and bookkeeping services; data processing and tabulating services; engineering, architectural and technical services; advertising services; business services, except m achinery and equipment rental and leasing, not elsewhere classified). In the definition provided by Rubalcaba-Bermejo (1999) business services "‘are the real activities (not financial) that influence first the competitiveness of companies through their use as intermediary inputs in the value chain, and v ia quality and innovation gains resulting from the interaction between supplier and

^ Such definition of “Producer Services” is partially arbitrary since it depends on the country and tim e period taken into consideration and on the threshold of the percentage of services sold to producers above which service industries arc considered as Producer Services. In Chapter five the parameters used for the analysis are described in more details.

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Chapter One: introduction

client services” (p.26). The definition provided by RubaJcaba-Bermejo (1999) is based on a functional criterion based on competitive aims, while the ISIC classification provides a list of activities that are computed as “business services”. The closeness with w hat is considered as marketing services in my research is evident, nonetheless if only business services are considered, the use o f services with marketing purposes is largely underestimated.

On the contrary, intermediate services overestimate it, since some of the service activities that are acquired as intermediate inputs by firms, especially those in financial services, are only marginally linked to marketing policies. Indeed, marketing activities are different from financial and insurance services but even these services can be very important marketing tools, as in the case of special financial and insurance deals and offers in selling expensive goods. Communications are not part of marketing, but they are still some of its fundamental tools since a major function of marketing is to establish a flow of information from final consumers to producers and vice versa. This strong interaction would be clearer with a statistical analysis (Chapter five) that shows that business services are the main consumers of communication services. The residual categories of intermediate services or “others” collects services such as catering, retail and wholesale trade that are part of marketing activities in many ways. Ownership and retail shops in franchise, for example, are very expensive, but relatively common ways of marketing high quality or standardized goods, while personal services are largely used as marketing tools. Once again, the link between marketing and these other services is made clear by the statistical analysis that outlines how retail sale activities are the largest business services- intensive activities.

Studying the development of both intermediate and business services to analyze the trend of expenditures and of employment in marketing activities is a useful solution for examining the evolution of the sector during the twentieth century. On the contrary, during the nineteenth century other solutions have to be found for two main reasons. The first concerns the lack o f data. Employment data and data on inputs produced in the nineteenth century are both insufficient for this type of 32

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analysis. Secondly, the statistical analysis for the later period is not properly suited to the nineteenth century due to the existence at this time of a different way o f organizing marketing activities. As described in chapter three, with th e transformation o f commercial strategies, m ost o f the marketing activities w e re initially performed inside the firm and thus they cannot be caught by statistics b ased on transaction between services suppliers and users. Employment statistics b y occupation may partially cover the gap, and indeed when this was possible it h a s been done, but fo r extensive analysis other solutions have been adopted. During th e nineteenth century, the evolution of marketing services is studied through two o f its m ain functions, namely distribution and prom otion.

A part from quantitative analyses, where distinctions among the various categories of marketing activities become important, the various names used to address marketing activities might be used as synonymous. In addition, despite th e technical differences, the term “commercial services” is also used to indicate m arketing services.

13 Literature Review

T he evolution and changing organization of marketing activities and their effects on the structure o f the econom y are issues upon which authors of various branches o f studies have touched. U seful insights into the subject are to be found in economic studies that took the structural change into consideration, but can also be seen in industrial economics, marketing, consumer, and social studies that analyze th e grow ing importance of professionals in societies and, of course, in the branch o f research that focused on distribution and its changing organization.

T he following scheme has the aim o f describing how the various authors h av e carried out research that, in one way or another, has contributed to m y analysis. S ince the aim of my research is to study the influence of the diffusion o f monopolistic com petition on the growth o f services, both branches of studies have been taken in to consideration, adopted and re-elaborated.

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Figure 1.3 Literature review

Lierature Review

From the left to the right, the various authors offered me the tools and the theoretical framework to study the effects of the diffusion of monopolistic competition in the growth of services.

The starting point" can be identified in Edward Hastings Chamberlin who in 1933 wrote The theory o f monopolistic competition. With his pioneering work the entire issue of using services in order to create and exploit monopolistic power was theoretically formulated. The main concept is the creation of a monopoly or monopolistic competition not in reference to a whole industry but to a part of it. Philip Strikes, to give his example, does not have a monopoly over the whole tobacco industry, but is the only manufacturer offering that particular product with that reputation. Other cigarettes would then be considered imperfect substitutes and consumers would continue to buy Philip Strikes until the expected benefits were

‘ Before Chamberlin’s book, the concept of perfect competition had been criticized by Piero Sraffa in his article “The laws of returns under competitive conditions". After that a theoretical debate led to comprehensive elaht>rations in the work of Joan Robinson. Nt>cholas Kaldor and Roy F. Harrod

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Chapter One: Introductioi

higher than price differential. Limited monopolistic power originates from thr& different factors: 1) Patents; 2) Product differentiation; 3) Market frictions. Patents as a lim ited number o f licences p er area, impede other firms from producing thf same go o d as the firm which patented it and thus give it a tem porary power oi monopoly. Apart from that, monopoly pow er derived by having close, but no perfect, substitutes generated through the market mechanism may originate frorr genuine differences in the product quality, appearance or performance, or from frictions in the market^. In the case of frictions in the market, authors talk about im perfect competition that differs from the monopolistic competition created by product differentiation (Keppler, 1994), Imperfect competition can originate from im perfect information (Kreps D.M. and W ilson, R„ 1982), differences in location, or consum er inertia. My research does not take into consideration the behavior of firms that have monopolistic power over a certain market because competitors are too far away, o r because for any reason consumers do not have knowledge o f com peting firms. M y research takes into consideration the efforts made by firms in order to gain m onopolistic power through product differentiation.

Figure 1.4 - Imperfect and Monopolistic competition

The importance o f product differentiation was adopted by consum er theory, which explained it through an analysis of the nature o f goods themselves'*. Part of the

^ Paul Klemperer (1987) carried out a very interesting study on the effects of market frictions and he identified the existence of “Switching Costs”. In his tenninology, they are the costs which customers incur when they switch from one type of good to another. The example that he proposed in his paper has become quite famous. He analysed the costs o f closing a bank account, getting infomiation to compare deals of various banks and opening a bank account in another bank.

^ Product differentiation pertains to all the material characteristics of the goods such as different quality, performance, availability or appearance, and the immaterial characteristics that create perceived differences among goods, such as the reputation o f the producer. The theory that was

proposed as the new consumer theory (Lancaster. 19(j6) introduced a new concept that apparently

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Chapter One: Introduction

literature went even further in trying to establish relationships between consumers’ behaviors and the various marketing strategies adopted by firms^. Market frictions, product differentiation and patents enable the creation of limited monopolistic power since they operate as market barriers^. From the development of the idea of product differentiation as a market barrier to competition the analysis made by Sutton (1991) is derived according to which the tools that created such barriers could be considered as “sunk costs”. Such tools were mostly composed of intermediate services. In his study, in order to quantify sunk costs he used firm s’ expenditure on adverting and R&D^, The idea of service activities as sunk costs that create barrier to competition is applied to the film industry by Gebem Bakker (2003,2005).

characteristics, and these characteristics give rise to utility; 2- In general, a good will possess more than one characteristic, and many characteristics will be shared by more than one good; 3- goods in combination may possess characteristics different from those pertaining to the goods separately" (Lancaster. 1966: 65). The concept of goods as a bundle of characteristics that have certain characteristics in common with other goods, but in which certain are different, is the key to reading the importance of product differentiation and identification. Each combination of product characteristics makes the good unique and not a direct substitute for other similar goods.

^ Without entering into details, it should be said that the approach of economists to such problems follows two different directories. On one side there are the behaviors of firms in “monopolistic competition", mostly analyzed within game theory (D.Fudenberg, J. Tiróle, 1984). On the other side there studies on consumer behavior (Solomon, M.R. 2002; A. Deaton 1980; Earl P. E.; Kenp, S. 1999). According to J. Hauser (1980, p.333) econometric models on consumer behavior fail to couple the theory o f utility with theories of information processing which is important in order to understand consumer responses to marketing strategies since “consumers are ill-informed, mis-informed and tend to sin^lify decisions". According to Hauser the core model of consumer behavior should take into consideration some key elements of consumer choices such as perception, preference and availability. ^ A first analysis of the creation of differentiated products as a means of creating monopoly power is provided by Bain. J. (1956) who. in his Barriers to new competition, identifies quality, performance but also commercialization as key elements of the barriers to entry: “Product differentiation is propagated by differences in the design or physical quality of competing products, by efforts of sellers to distinguish their products through packaging, branding, and the offering of auxiliary services to buyers, and by advertising and sales-promotional efforts designed to win the allegiance and custom of the potential buyer". According to Bain the commercialization of goods is “at least the same general order of importance as an impediment to entry as are economies of large-scale”.

^ J. Sutton (1991) identified two kinds of industries with different levels of intensity with regard to services. In the first type, “firms enjoy economies o f scale based mostly on price. Products are homogeneous and competition is based essentially on price. Markets of this type are steel, wood, and paper, cement, shipbuilding, wool and cotton. (..) On the contrary, in sectors where intangible investment is high, research and development directed at new products and processes or advertising to establish brand names and reputation are used by the firms involved as strategic tools to improve their market position. In market type one: market size increases, profits increase, and given free enuy\ firms enter until the profits of the last entrant just cover the exogenous overhead costs paid on entry. When the market size increases, there is an increase in the number of firms and reduced concentration. On the contrary, in market type two: 1) firms enter, paying exogenous costs to set up a plant; 2) firms decide their advertising and /or R&D level and 3) compete in price. As market size increases, the gain in market share by firms escalating their advcrtising/R&D expenditure is then proportionately great and we expect a concentration process. Industries can react with an escalation mechanism (firms

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Chapter One: Introduction

W ith the introduction o f the concept o f ‘'monopolistic competition” , economic theory ceased to ignore the role o f intermediaries, which had been considered totally useless in the world o f perfect information and competition of traditional economic theory, and recognized the function of com m ercial competitive advantages. T h e theory o f monopolistic com petition has served as a base for the development o f a branch o f literature on com petitive advantages. The main voice of the latter branch o f studies is probably Porter (1985) who distinguished competitive behaviors into tw o types, nam ely price reduction and product differentiation, where the second category is based on the concept of monopolistic competition. Pierre Buigues (1999) tried to cast som e light on the characteristics related to both tangible and intangible activities, relating them to the type of com petitive strategy pursued by the firm, but also to th e existence o f sunk costs and econom ies of scale and scope.

Table 1.1 Characteristics o f Tangible and Intangible activities. Existence of statistical in d ic a to rs E xistence of positive externalities S u n k c o st Economies o f scale o r scope T ype of co m p etitio n In ta n g ib le activities Low H igh (in R&D training) High (reputation) Economies of scope D ifferentiate d services, non price T a n g ib le activities

High Depends, but

generally low Depends Economies of scale Price competition

M ortensen J. (1999) went even further and tried to calculate the total increase on intangible investments in the US economy. According to his calculations, share o f intangibles rose from 42% in 1948 to 54% in 1990. Another field o f research

invest more on R&D and advertising with a concentration effect), or with a proliferation mechanism (firms have a stronger incentive to introduce a new variety rather than escalate R&D on an existing variely)".p. 89

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analysed the evolution o f the weight of intangible activities by taking into consideration one or two representative functions. An example of this field of research is the one proposed by Matraves (1999) in which he computed the evolution of spending for R&D as a share o f sales volume in the m ost important pharmaceutical companies. The results show a significant increase in almost every case. To the literature on monopolistic competition and competitive advantages, I am indebted particularly for the theorization of the creation and the exploitation of economic barriers to entry based on commercial services. On the contrary the literature on monopolistic competition failed to provide long-term perspective or evolutionary analyses.

An exception is Kay J. (1999) who reckons that no-price competition is becoming the predominant competitive advantage because size and trade restrictions no longer constitute strategic competitive advantages. Innovation is still a competitive advantage, but, since its life cycle is diminishing, tools for the exploitation of innovation, such as brand and reputation, became more important than innovation per se. Strategic competitive advantages rely on the relationships surrounding the firm, for example flexible and co-operative behaviour, information sharing and the creation of organizational knowledge. Other descriptive interpretations of the characteristics of the modem firm’s competitive advantages over the traditional firm confirm the greater importance of “intangible” rather than “tangible” assets; however, for a more theoretical approach to the evolution of monopolistic competition w e need to refer to other branches of studies.

Business studies (level 3, cell 2) provide an insight into how monopolistic competition was pursued and achieved. Among those that analyzed the use o f aggressive marketing strategies in manufacturing industries the main voice is undoubtedly that of Alfred Chandler (1977, 1990). Even if he did not use a clear theoretical framework in order to interpret competitive behaviors and transformation in business organization, his study offered an interesting historical evolution of the firms he took into consideration. He also proposed a few factors that he considered as determinant in the transformation of business strategies and organization. In his

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