The Mathematical Principle On The Formation Mechanism Of Excess Capacity In China

To mathematical study the formation mechanism of excess capacity in the SCP paradigm of industrial organization,after analyzing the causes of excess capacity as a direct cause of the decisionmaking errors of the enterprise and two root causes of market failure and government failure,this paper studies the formation mechanism under each of the causes.Based on the research on the existing formation mechanism,we put forward three formation mechanisms:(1)One of the mechanism of the direct cause of enterprise decision-making errors leading to excess capacity,entrepreneurship and excess capacity.(2)One of the mechanism of the root cause of market failure resulting in excess capacity,industry prospect,market preemption and excess capacity.(3)One of the mechanism of the root cause of government failure giving rise to excess capacity,resource soft constraints,environmental hard constraints and excess capacity.The conclusions of the three formation mechanisms are as follows:Whatever root cause is market failure or government failed,the firstly direct cause of excess capacity is the entrepreneurial decision-making mistakes.Because entrepreneurship is the logical starting point for entrepreneurial decision-making,this paper theoretically explores the mechanism and effect of how entrepreneurship cause excess capacity for the first time.The mathematical model reveals that:(1)The mechanism by which the external market forecast of an entrepreneur can determine excess capacity is that the underestimation of the market preference by the entrepreneur in establishment phase leads to the shortage capacity in production phase,and the overestimation of the market preference in establishment phase leads to excess capacity in production phase;(2)The mechanism by which the internal cost control of entrepreneurs can determine excess capacity is that the lower investment cost of the entrepreneur in establishment phase causes the enterprise to retain and survive in the market in production phase and do not exacerbate excess capacity of the industry,and higher investment costs of the entrepreneurs in establishment phase of the high investment costs causes the enterprise to withdraw from the market in production phase,thereby exacerbating excess capacity of the industry;(3)Excess capacity leading by entrepreneurs reflected not only low capacity utilization,but also a series of complications of zombie businesses,bad debts and unemployment in the industry.The theoretical contributions of the model to the mechanism of excess capacity are mainly as follows:(1)For the direct cause,the single and combined effects of excess capacity caused by the errors of market forecasting and cost control are revealed;(2)The causal relationship and direct effects,correlation concomitant effects between entrepreneurship and excess capacity are proposed,so that many of the accounting,statistical indicators of excess capacity inspection can be organically related and unified;(3)Based on the theoretical connection of these quantitative indicators,the econometric models and test rules that can be used to empirically analyze entrepreneurs in order to determine the effect of excess capacity are given.This theory is instructive in the design of the mechanism to prevent overcapacity ex ante and the design of the mechanism to eliminate excess capacity ex post.Whether and how the preempted firm lead to industrial excess capacity? In this paper,effects of capacity utilization were mathematically analyzed in market preemption equilibria of three different combinations of prospect property(good vs bad),entrance property(barrier vs free),investment property(light asset vs heavy asset)of the industry.The study found that:(1)for the entry barrier of asset light industry,if prospect is bad,current capacity is normal,future capacity is excess;if prospect is good,both current and future capacities are normal,if prospect is better,current capacity is normal,future capacity is excess.(2)for the entry barrier of asset heavy industry,if prospect is worse,both current and future capacities are shortage;if prospect is bad,current capacity is normal,future capacity is excess;if prospect is good,both current and future capacities are shortage;if prospect is better,both current and future capacities are normal;if prospect is best,current capacity is normal,future capacity is excess.(3)for the entry free of asset micro industry,no matter what the prospects are,both current and future capacities are excess.(4)for the entry free of asset light industry,if prospect is worse,current capacity is normal,future capacity is excess;if prospect is bad or good,both current and future capacities are excess.(5)for the entry free of asset heavy industry,if prospect is worst,both current and future capacities are shortage;if prospect is worse,current capacity is normal,future capacity is excess;if prospect is bad or good,both current and future capacities are excess.The discovery has three academic implications for understanding market essence of excess capacity:(1)scant demand and excess capacity are not the reverse side of the coin,scant demand may lead to excess capacity,but it may also lead to capacity shortage,and excess capacity may be the result of excess demand.(2)for good prospect,the investing tide lead to excess capacity in addition to potential firm market entering tide,but also to the incumbent firm capacity expanding tide.(3)excess capacity occurs not only when information asymmetry or market uncertainty,but even occurs when information is symmetric and market is determined.In the marginal contribution of the relevant literature,the classical conclusion that market preemption lead to persisting excess capacity is the preemption equilibrium in special case,its classical proposition is special case of this paper.In the design guide of industrial policy,to prevent excess capacity,accurate identification of industrial entrance,prospect,investment properties are a necessary and sufficient condition to accurately determine the industry whether,when,and how happens excess capacity;to resolve excess capacity,supply problems(e.g.reestablishment lead to excess capacity)tries to solve by demand(e.g.stimulating demand)is futile,sometimes counterproductive(e.g.exacerbate excess capacity).An evolving formation mechanism on long term excess capacity in China was proposed under the general equilibrium system of monopoly competition: situation I: natural excess capacity was formed under no government intervention ? situation II: distorted excess capacity was formed under the soft constraints of resources ? situation III: distorted excess capacity was aggravated under the hard constraints of environment ? situation IV: cut capacity.In situation I of no government intervention,natural excess capacity was determined by both enterprise internal production cost and enterprise external product demand.Soft constraints of resources in situation II makes distorted excess capacity of the industry besides natural excess capacity: material resources soft constraints make distorted excess capacity of the entrance of new enterprises of reestablishment,human resources soft constraints make distorted excess capacity of the withdraw of zombie enterprise of having capacity but no output.Hard constraints of environment in situation III aggravated distortion of excess capacity: direct hard constraint on the environment make the withdraw of zombie enterprise of having capacity but no output once again and then increase distortion of the excess capacity,indirect hard constraint on the environment make the entrance of new enterprises of repeated construction and then increase distortion of the excess capacity.In situation IV of cutting capacity,based on the new fundamentals of both the soft constraints in resources and the hard constraints in environment,optimal enterprise number reduction and retention,optimal enterprise capacity reduction and retention,optimal industry production capacity reduction and retention should be used as a target for cutting capacity.This evolutionary system promotes the formation mechanism of excess capacity from local equilibrium analysis to general equilibrium analysis under the industrial organization SCP research paradigm;unlike the explanation of the mechanism of overcapacity in developed countries,this evolutionary system gives an evolutionary explanation of the long-term mechanism of excess capacity in the process of continuous improvement of institutional mechanisms of catching and surpassing strategies of developing economy,like China;and many views of excess capacity based on government failure are special cases of material resources soft constraints of the evolutionary system.