ECONOMIC-CHANGE AND INDUSTRY STRUCTURE - THE EXAMPLE OF BANKING

Adam Smith and George Stigler have argued that, with growing markets, firms will spin-off more and more activities and leave them to independent specialized suppliers. It is clear, however, that it is not only market growth that matters but also how market growth affects the balance between management and transaction costs. This paper argues that those activities for which market growth goes hand in hand with substantial innovations will not be spun-off. Based on work by Langlois [1988] and von Weizsacker [1991], several hypotheses are developed which support this conclusion. These hypotheses are then applied to the banking industry. Banking is a good test case for studying these hypotheses because in this industry telecommunications has led to a widening of markets and, in addition, to substantial process and product innovations. Our conclusion is that the hypotheses advanced in this paper appear to be confirmed in the field of banking.