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Technological Change and the Theory of the Firm: The American Locomotive Industry, 1920–1955*

Published online by Cambridge University Press:  11 June 2012

Thomas G. Marx
Thomas G. Marx
Affiliation:
Economic Consultant, Foster Associates, Inc.
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Abstract

This study analyzes the differing managerial behavior of the three dominant firms in the steam locomotive oligopoly as diesel locomotives replaced steam.

Type
Research Article
Information
Business History Review , Volume 50 , Issue 1 , Spring 1976 , pp. 1 - 24
Copyright
Copyright © The President and Fellows of Harvard College 1976

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References

1 Nelson, Richard R., “Issues in the Study of Industrial Organization in a Regime of Rapid Technical Change,” in Fuchs, V. R., ed., Policy Issues and Research Opportunities in Industrial Organization (New York, 1972), 40.Google Scholar

2 Chandler, Alfred D. Jr., Strategy and Structure: Chapters in the History of the American Enterprise (Cambridge, Mass., 1962), 41.Google Scholar

3 There are many instances of decision-making during periods of rapidly changing markets and technology that demonstrate the inadequacy of the profit maximization model. The experiences of Lehigh Coal and Navigation, International Mercantile Marine Lines, American Car and Foundry (ACF), Curtiss Wright, and Pet Incorporated, among others, are all instructive.

4 Machlup, Fritz, “Theories of the Firm: Marginalist, Behavior, Managerial,” American Economic Review (March, 1967).Google Scholar Reprinted in Mansfield, E., ed., Micro-Economics, Selected Readings (New York, 1971), 102.Google Scholar

5 The diesel engine is the most thermally efficient engine. It turns more heat energy into work: 36 per cent compared to 18 per cent for the steam engine, and thus exhibits great fuel economies. This was especially true in the earlier period of diesel development when diesel oil was an unwanted by-product of higher-grade oil. The diesel engine also runs cleaner and smoother and is available for service a much greater percentage of the time. Steam engines had to be shut down regularly for maintenance, and to clean out clinkers and ashes.

6 Allen, C. J., Modern Railways (London, 1959), 148.Google Scholar

7 The diesel switcher was available for service nearly 23 hours a day, compared to only 17 hours for steam switchers, which had to go to the roundhouse two or three times a day for fuel and water and which also required more downtime for maintenance.

8 “How Much Is Diesel Fuel Ousting Coal?”, Railway Age (March 8, 1947), 488.

9 The diesel locomotive consists of “A” and “B” units. The horsepower of a diesel locomotive can be increased by coupling a “B” unit to an “A” unit without duplicating all of the operating controls and mechanisms of a full “A” unit. This design feature became extremely important as postwar traffic demands required higher horsepower ratings.

10 Reck, F. M., On Time (Detroit, 1948), 103.Google Scholar

11 Mansfield, Edwin, The Economics of Technological Change (New York, 1968), 114.Google Scholar

12 Middleton, P. H., Railways and the Equipment and Supply Industry (Chicago, 1941), 68.Google Scholar

13 American Locomotive Company Annual Stockholders' Report (1939).

14 Seven of eight railroads responding to an industry questionnaire indicated that General Motors' postwar diesel freight locomotive was a vastly improved product. The list of improvements is extensive. Improvements were made in liners, seals, governors, bearings, rings, pistons, lubrication pumps, oil coolers, and the cooling system. Traction and train control were better; structural improvements had been made; the locomotive exhibited greater reliability and required less maintenance. Of course, Aleo and Baldwin conducted experiments during the war, but could not actually produce and road-test locomotives. They obviously could not refine tooling and production methods either.

15 Turner, D. F. and Williamson, O. E., “Market Structure in Relation to Technical and Organizational Innovation,” in Heath, J. B., ed., International Conference on Monopolies, Mergers and Restrictive Practices (London, 1971), 133.Google Scholar

16 Mansfield, Economies of Technological Change, 105.

17 Healy, K. T., “Regularization, of Investment in Railroads,” in Regularization of Business Investment (Princeton, 1954), 79.Google Scholar

18 American Locomotive Company Annual Stockholders' Report (1931).

19 American Locomotive Company Annual Stockholders' Report (1929).

20 For several years following the introduction of each of the diesel locomotives (switcher, passenger, and freight), sales were very low. There then occurred a sharp break, with sales trebling or more, and continuing at this higher annual rate. For the diesel switcher, this “break” occurred in 1941, six years after its introduction. See Healy, Regularization of Business Investment, 175.

21 American Locomotive Company Annual Stockholders' Report (1933).

22 Healy, Regularization of Business Investment, 177.

23 American Locomotive Company Annual Stockholders' Report (1939).

24 Healy, Regularization of Business Investment, 177.

25 “Address by S. M. Vauclain to the American Railroad Association,” Railway Age, vol. 88, No. 250 (June 25, 1930), 1548D144.

26 Baldwin Locomotive Works Surveys the Motive Power Situation in America (Philadelphia, 1937), 61.

27 Ibid., 20.

28 Baldwin, Lima-Hamilton Corporation Annual Stockholders' Report (1948), · 2.

29 The steam locomotive-building oligopoly, noted for its market sharing “agreements,” was insulated from potential competitors by excess capacity, high capital entry costs, and strong buyers' preferences for established products. The capital market exerts profit-maximizing pressure through funds-metering, incentive, and management-displacement mechanisms. None of these controls is particularly effective, however. Oliver Williamson has summarized the disadvantages under which the capital market operates. See Williamson, O. E., Corporate Control and Business Behavior (Englewood Cliffs, N.J., 1970)Google Scholar: “Surveillance from the capital market surely bounds the opportunity set within which the management of an oligopolistic firm feels free to operate. At the same time, however, it is important to note that the external control relationship that the capital market bears to the firm severely limits the extent to which capital market controls can be expected to be efficacious. … [The capital market is not very effective] for three reasons: its external relation to the firm places it at a serious information disadvantage; it is restricted to non-marginal adjustments; it experiences nontrivial displacement costs” (103, 109).

30 Simon, H. A., “Theories of Decision-Making in Economic and Behavioral Sciences,” American Economic Review (June, 1959).Google Scholar Reprinted in Mansfield, ed., Micro-Economics, 87.

31 The decision-making problem can be modeled as follows. Assume a partial managerial utility function of the form U = U (P, S), where P = reported profits, and S = the pref erence for existing steam technology.

The utility function can be generalized by interpreting S as a preference for the existing technology. S is measured as the amount of profit that is sacrificed to entertain the technology preference. Let P* = maximum obtainable profits, and Pm = the minimum amount of profits that must be reported to avoid stockholder opposition to the incumbent management. Thus, S assumes values in the range 0 ≤ S ≤ λ where λ = P* - Pm.

The objective of management is to maximize U = U (P, S), subject to P ≥ Pm. Reported profit is a function of the technology preference and the economic environment, which defines profit opportunities. Thus, P = P (S, E), where ∂P/∂S < 0, and ∂P/∂E > 0.

During periods of technological stability, the value of S is near the lower limit. However, as new technologies rise to challenge existing techniques, S increases until it reaches the upper bound (λ). At this point, the firm must abandon its preference for the existing technology, and adopt a technological posture, S͂ < S, more consistent with emerging technical progress. At the limit, the firm must accept technological posture S* = 0, i.e., the firm must switch from utility maximization to profit maximization as competitive pressure reduces P* to Pm.

Baldwin and Lima sought to maximize U; however, technological competition from diesel motive power limited achievement to the maximization of P. Thus, the question is why Baldwin and Lima could not adjust aspirations downward to the level of achievement attainable, i.e., why they could not adopt technological posture S* = 0 to avoid stockholder opposition or business failure.

32 Mansfield, Economics of Technological Change, 122.

33 Ball, D. Jr., Portrait of the Rails (Greenwich, Conn., 1972), 1–3.Google Scholar

34 “A Locomotive Cost $100,000,” Fortune, vol. 12 (October 1935), 112.

35 “The Dropouts,” Forbes 100, No. 6 (September 15, 1967), 161.

36 “A Locomotive Cost $100,000,” 112.

37 Mansfield, Economics of Technological Change, 123.

38 Ibid.

39 Ball, Portrait of the Rails, 2.

40 March, J. G. and Simon, H. A., Organizations (New York, 1958), 184.Google Scholar