John Roberts Altered the Study of Industrial Organization

Written

John Roberts Altered the Study of Industrial Organization

John Roberts' groundbreaking work in industrial organization affected the course of economic research and inspired a new generation of economists.
November 1, 2010

Dressed in a tank top and funny hat on a warm spring day in 1989, Scott Schaefer was about to leave his undergraduate economics class by the back door when he noticed Professor Paul Milgrom, PhD '79, and a broad-shouldered guest professor with wavy hair and glasses staring at him from the front of the room. Schaefer took the look as a cue to approach and when he did, Milgrom asked, "Are you ready to go?"

Apparently, Schaefer's roommate had forgotten to pass along a message that Milgrom and John Roberts, an economist on the faculty of Stanford GSB, wanted to take him to lunch at the Stanford Faculty Club after class that day. Unlike Roberts, who was clad in a dark blue blazer, Schaefer had not dressed for the occasion.

At lunch, they discussed a paper Schaefer had written for class. "You should be an economist," they told him. Bubbling over from their attention, Schaefer acquiesced. He earned a doctorate at the business school in 1995 and today is a professor of economics at the University of Utah.

At a September conference at Stanford GSB, Schaefer was among several of Roberts' former students and coauthors to present reflections of how his work and mentorship affected both the course of economic research and their lives. The conference, organized by Roberts' former students Susan Athey, PhD '95, now a professor at Harvard, and Robert Gibbons, PhD '85, now a professor at MIT, was an opportunity for veterans to step back and assess four decades of research while giving doctoral students a chance to witness these scholars present the history of their chosen field and Roberts' central role in it. Others who spoke at the conference were MIT Professor Bengt Holmstrom, PhD '78; University of Pennsylvania Professor Andrew Postlewaite; Jonathan Day, managing partner at Heidrick and Struggles; and Stanford economics Professors Kyle Bagwell, PhD '86 and Nick Bloom.

Roberts, the John H. Scully Professor of Economics, Strategic Management, and International Business, has been teaching at Stanford since 1980. He has published more than 70 articles in academic journals, 2 books, and 30 business cases. His work has ranged from using game theory to study public goods problems to running field experiments on the impact of improving management practices. Along the way, he has gained a throng of admirers among his students and colleagues.

Roberts' journey to academia began when he was still in high school in Winnipeg. Back then, his peers referred to him as "The Professor," but "it was not meant as a compliment. I suppose I was a bit of a know-it-all," he recalls. Then in 1962, in an introductory college economics course, he realized that he wanted to be an economist. "It seemed to answer so many questions, especially regarding the role of Keynesian fiscal policy in fighting unemployment," Roberts remembers. "Ironically, I have never done any research on such issues."

His best known research is in industrial organization, where he and Milgrom introduced the study of the strategic impacts of information differences between interacting parties on industrial behavior. Although their logic is often very subtle, their insights and methods revolutionized the way industrial competition is modeled and led to adoption of these methods in other fields

Their first effort in this direction was a paper titled "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," which appeared in Econometrica in 1982. At the time, many economists thought limit pricing - the act of a firm purposefully setting low prices to deter new competitors - was irrational. Roberts and Milgrom showed that it would be rational if potential entrants to the same market took the price as an indicator of how low the incumbent's costs were and thus how tough a competitor it would be. Strikingly, however, they also said the potential entrant would, if it understood the economics of the situation, infer the incumbent's actual costs from observing its price and thus would enter the market in exactly the same circumstances as it would were it informed directly about the incumbent's costs. Still, the incumbent must reduce its prices from the monopoly level or it will be thought to be limit pricing but have high costs that would encourage entry.

"It was one of the most exciting times in economics that I ever observed and could ever imagine," Roberts says. "Traditional wisdom was being turned on its head every day." He remembers presenting their paper to some of the "major stars of economics," and his assertion that "equilibrium limit pricing does not deter entry" was met with disbelief.

At least one of their senior colleagues found the entire idea of building theories based on private information - meaning information not directly observable by others - to be destructive to economics as an empirical science, Milgrom recalls. "Thank God for John who said, 'No, we're on to something. Let's stick with it.' And we did."

Today the role of information differences in explaining behavior is accepted among economic theorists, and hundreds of researchers have built upon the initial research, exploring predation and other strategic behavior in industrial organization.

But economics is not the only thing that takes up Roberts' time. The students and colleagues who've spent hours at his table know the native of Canada is also somewhat of a gourmet. He is an excellent cook, and during the winter holidays, he annually spends two days in the kitchen preparing traditional cassoulet, a complex French pork and bean recipe.

Of all his work, Roberts indicates that he is proudest of the textbook he coauthored with Milgrom, titled Economics, Organization, and Management, which was the first to apply economics to the organization and management of companies. The book has garnered many thousands of citations in scholarly articles, an unparalleled accomplishment in economics. Reading it first as a graduate student, Athey said she was struck by the fact that "every single paragraph can be perfectly formalized in a model. How you can fill an entire book with perfectly crafted paragraphs is an amazing feat."

The Economist called Roberts' other book, The Modern Firm, the best business book of 2004. In it, Roberts analyzes the interaction between the optimal organizational design of business firms, their strategies, and the business environments in which they operate. He argues that changes in organizational design can be predictable and that they can improve performance and growth as long as these factors are examined in a holistic way.

Recently, Roberts, with Stanford economics Professor Nick Bloom and other young scholars, has been studying experimentally the effects of improving management practices. When Bloom first considered an academic career, a mentor connected him with Roberts in London. Bloom expected to meet the venerable figure in one of the many restaurants or cafes suitable for an academic discussion. Instead, Roberts led them to a pub near Bloom's office called the Drunken Captain, where Bloom noticed a strange, pungent odor wafting from Roberts' direction. He tried to ignore it. After a beer, Roberts "said he had just been out shopping for strong cheeses," Bloom recalled. "Since that time he has been a very easy person to work with."

By Nicole Ely

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