Escolar Documentos
Profissional Documentos
Cultura Documentos
Industrial organization
From Wikipedia, the free encyclopedia
Journals · Publications
Categories · Topics · Economists
Structure, conduct, performance
Economic ideologies
According to the structure-conduct-performance approach, an
industry's performance (the success of an industry in Anarchism · Capitalism
Communism · Corporatism
producing benefits for the consumer) depends on the conduct Fascism · Feudalism
of its firms, which then depends on the structure (factors that Georgism · Imperialism
determine the competitiveness of the market). The structure Islamic · Laissez-faire
of the industry then depends on basic conditions, such as
1 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
Industrial organization The subject of industrial organization applies the economics’ model of price
theory to the real world industries. The goal of industrial organization study is to increase the
understanding of how industries operate, improve the industries contribution to the economic
welfare, and to improve government policy toward these industries.
Economists are especially interested in studying the SCPP because they tend to believe that seller
concentration affects the industry’s social performance. The economic theorists express that effect in
terms of higher profits earned by the monopoly. On the other hand, Industrial Organization
economists express the effect in terms of locative inefficiency. However, economists who use the
Structure Conduct Performance (SCP) approach disagree on the emphases that they give to each of
the three elements. Some give market structure and market conduct an equal importance in
determining market performance. Others argue that market conduct is largely determined by market
structure, hence, market performance depends heavily on market structure, and that leads them to
pay little attention to market conduct.
Market Structure Conduct and Performance SCP framework was derived from the neo-classical
analysis of markets. The SCPP was the brainchild of the Harvard school of thought and popularized
during 1940-60 with its empirical work involving the identification of correlations between industry
structure and performance. This SCP hypothesis has led to the implementation of most anti-trust
legislation. The Chicago school of thought followed this from 1960 to 1980. They emphasized on the
rational for firms becoming big, price theory and econometric estimation. During 1980-90 game
2 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
theory took center stage with emphasis on strategic decision-making and Nash equilibrium concept.
After 1990, empirical industrial organization with the use of economic theory and econometrics led
to complex empirical modeling of technological changes, merger analysis, entry-exit and
identification of market power.
Market structure The Market structure consists of the relatively stable features of the market
environment that influence rivalry among the buyers and sellers operating within this market. The
main elements that influence market structure are, seller concentration, product differentiation,
barriers to entry, barriers to exit, buyer concentration, and the growth rate of market demand. Other
elements of market structure exist, but they are usually unstable and therefore ignored either because
they can’t be measured or because they are hard to observe.
Elements of market structure Seller concentration Refers to the number and size distribution of
firms in the market. The most widely used device is determining seller concentration is the
Concentration Ratio. To compute the concentration ratio, the firms are ranked in order of size
“usually measured in terms of sale”, starting from the largest in the industry at the top and going
down to the smallest firm at the bottom. Concentration ratios are usually given for the largest 4,
largest 8, and sometimes the largest 20 firms. Usually industries that are highly concentrated in one
advanced economy tend to be highly concentrated in another.
Horizontal differentiation When products are different according to features that can't be ordered in
an objective way, or in other words, at the same price, some consumers would prefer the product
while others would prefer a different substitute Horizontal differentiation can be differentiation in
colors (different color version for the same good), in styles (e.g. modern/antique), or in tastes. A
typical example is the ice cream offered in different tastes. Chocolate is not better than Mango.
Vertical differentiation Vertical differentiation occurs in a market where the several goods that are
present can be ordered according to their objective quality from the highest to the lowest. It's
possible to say in this case that one good is "better" than another.
Mixed differentiation Certain markets are characterized by both horizontal and vertical
differentiation. For instance, apparel, and shoes have a rich combination of shapes, colors, materials,
and appropriateness to social events. In such markets, the differences in colors or shapes are
horizontal differentiation, while the quality of the materials is usually perceived as vertical
differentiation.
Barriers to entry A set of economic forces that create a disadvantage to new competitors attempting
to enter the market. These forces could be government regulation such as IP rights, or patent, or they
could be large economies of scale in a specific industry, or high sunk costs required to enter the
market. Sometimes firms within a specific industry adopt certain pricing strategies to create barriers
to entry, one of the most widely adopted strategy is “Limit Pricing” by lowering prices to a level that
would force any new entrants to operate at a loss, this strategy is especially effective when the
existing firms have a cost advantage over potential entrants.
Barriers to exit A set of economics forces that influence the firms decision of exiting the market,
3 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
such forces make it cheaper for the existing firm to stay in the market than to exit the market.
Although sunk costs could be barriers to entry, especially when the sunk costs are too large, sunk
costs could be a huge barrier to exit as well, because large investments in fixed plant and equipments
commits the firm to stay in the market. Barriers to exit increase the intensity of competition in an
industry because existing firms have little choice but to stay and fight when market conditions have
deteriorated. The loss of business reputation and consumer goodwill, could be a barrier to exit
especially if the firm is planning on reentering the market later, or when the firm exits a specific
market but still operating in other markets. In such a situation, the decision to leave the market can
seriously hurt the reputation of the firm among current consumers in other markets, and affect the
goodwill among previous customers, not least those who have bought a product which is then
withdrawn and for which replacement parts become difficult or impossible to obtain.
Buyer concentration The number of buyers in a market. Buyer concentration is as equally important
as seller concentration, especially in markets with a few buyers. The term was used by Michael E.
Porter in 1979 in his “Five Forces Analysis”. Porter’s analysis proposes that in markets with high
buyer concentration, the firms earn lower level of profits than in markets with low buyer
concentration
The growth rate of market demand The market structure in industries with a relatively static
demand or low growth rate of demand is different from the market structure in industries with an
accelerated demand growth. That’s because when the demand grows fast enough, the firms have their
hands full just expanding their production capacities, in this case, if new entrants are coming in, there
will be little incentive to fight for market share. Also, firms are likely to honor oligopolistic
agreements with each other, and profits tend to be high. All these elements of market structure tend
to be stable over time. However, they are all interrelated. Any change in one tends to bring about
changes in another. By realizing this relation among the different elements of market structure, it
becomes easier to understand why market structures change over time.
Conduct Conduct means what firms do to compete with each other. It includes pricing, advertising,
research and development investment, decisions on product dimensions, merger and acquisition, etc.
Conduct also can include collusion both explicit or tacit.
SCP Interaction Overview There are two competing hypotheses in the SCP paradigm: the
traditional “structure performance hypothesis” and “efficient structure hypothesis”.
4 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
The structure performance hypothesis states that the degree of market concentration is inversely
related to the degree of competition. This is because market concentration encourages firms to
collude. This hypothesis will be supported if positive relationship between market concentration
(measured by concentration ratio) and performance (measured by profits) exist, regardless of
efficiency of the firm (measured by market share). Thus firms in more concentrated industries will
earn higher profits than firms operating in less concentrated industries, irrespective of their
efficiency.
The efficiency structure hypothesis states that performance of the firm is positively related to its
efficiency. This is because market concentration emerges from competition where firms with low
cost structure increase profits by reducing prices and expanding market share. A positive relationship
between firm profits and market structure is attributed to the gains made in market share by more
efficient firms, but not to the collusive activities, as the traditional SCP paradigm would suggest
(Molyneux and Forbes, 1995).
Early studies by Bain (1951; 1956) hypothesized a positive relationship between industry
concentration, barriers to entry and profits. Though his studies are flawed in the measurement of
profit rates and choice of industries (Brozen 1971), later papers supported this hypothesis (Mann
1966; Weiss 1974).
However, the differential in the performance measures between concentrated and non-concentrated
industries fell substantially overtime (Brozen 1971; Hubbard and Petersen 1986). Moreover, studies
based on more recent data tend to find only a weak relationship or no relationship between the
structural variables and performance (Salinger 1984; Kwoka and Ravenscraft 1985). As a result,
some econometric studies began to look at other factors impacting industry performance. These
studies commonly found that high rates of return and industry growth are related.
Conduct is influenced by market structure since firm strategies differ with competition. Inversely,
conduct can influence market structure because firms can make entry cost endogenous by choosing
different levels of quality, advertising and so on, thus affect the potential entrant number.
Conduct is related to performance. For example, advertising expenditure is usually higher in highly
profitable industries, because firms with more profits can afford higher advertising costs, and in order
to keep their profits and prevent new entrants into the profitable market, these firms would use
advertising investments as endogenous sunk costs. Econometric studies linking profit to market
5 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
structure often conclude that measured profitability is correlated with the advertising-to-sales ratio
and with the R&D expenditures-to-sales ratio.
Conclusion
In essence, with the SCPP we seek to find the answer to how firms interact and compete with each
other in different situations, and the results of these interactions, and are these results consistent with
an ideal competition or not. That way, an argument can be supported on whether or not action should
be taken to alter the market structure or regulate market conduct. It is interesting there is such a
debate on the emphasis on market structure vs. market conduct on the influence of performance since
it is clear that structure and conduct are themselves influenced by each other. Joseph Bain was one of
the first to realize this and his work led to the re-evaluation of public policy that had been fostered by
the SCP framework. In industrial organization, real world, imperfect competition is studied, and
there are so many different examples that the way markets are evaluated is continually evolving and
changing. Thus every school of thought must be constantly re-evaluated as more data is generated.
Reference:
Carlton and Perloff (2005), Modern Industrial Organization, 4th Edition, Pearson, Addison Wesley.
Charles C. Fisher. “What can economics learn from marketing’s market structure analysis?”.
Contribution of Marketing MSA to Economics MSA. http://www.westga.edu/~bquest
/1997/ecnmkt.html
Caves, E Richard (January 1992). “American Industry: Structure, Conduct, Performance”. Prentice
Hall, 7th E. pp 3-36
Edwards, Allen and Shaik (2006), "Market Structure Conduct Performance (SCP) Hypothesis
Revisited using Stochastic Frontier Efficiency Analysis," presentation at the American Agricultural
Economics Association Annual Meeting, Long Beach, California.
Marion, Bruce. "Structure, Conduct, Performance Paradigm to Subsector Ananlysis." (1976): Print.
Michael E. Porter, Interbrand Choice, strategy, and bilateral market power (Cambridge, MA: Harvard
University Press, 1976).
Pepall, Lynne, Dan Richards, and George Norman. Industrial Organization Contemporary Theory
and Empirical Applications. 4th ed. Malden, MA: Blackwll Publishing, 2008. Print.
Weiss, Leonard W. “The Structure-Conduct-Performance Paradigm and Antitrust.” Apr., 1979 pp.
1104-1140. The University of Pennsylvania Law Review. http://www.jstor.org/stable/3311794
Market structures
The common market structures studied in this field are the following:
Perfect competition
Monopolistic competition
Oligopoly
6 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
Oligopsony
Monopoly
Monopsony
Areas of study
Industrial organization investigates the outcomes of these market structures in environments with
Price discrimination
Product differentiation
Durable goods
Experience goods
Secondary markets or second-hand markets, which can affect the behaviour of firms in
primary markets.
Collusion
Signalling, such as warranties and advertising.
Mergers and acquisitions
Entry and Exit
A competitive market structure has the performance outcome of lower costs and lower prices,
(Shepherd, W: 1997:4).
The subject has a theoretical side and a practical side. According to one text book: "On one plane the
field is abstract, a set of analytical concepts about competition and monopoly. On a second plane the
topic is about real markets, teeming with the excitement and drama of struggles among real firms"
(Shepherd, W.; 1985; 1).
The extensive use of game theory in industrial economics has led to the export of this tool to other
branches of microeconomics, such as behavioral economics and corporate finance. Industrial
organization has also had significant practical impacts on antitrust law and competition policy.
See also
Main article: Outline of industrial organization
Bertrand competition
Competition law
Competition policy
Cournot competition
Input-output model
Theory of the firm
7 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
Relevant market
SSNIP
Important publications in industrial organization
Model of Industrial Organization
Notes
1. ^ a b c Dennis W. Carlton and Jeffery M. Perloff (2004). Modern Industrial Organization, 4th edition, pp.
2-3. Description. (http://www.lavoisier.fr/notice/frSWORK23A3RW32O.html)
2. ^ Richard Schmalensee (1987). "Industrial Organization," The New Palgrave: A Dictionary of
Economics, v. 2, p. 803.
3. ^ Jean Tirole (1988). The Theory of Industrial Organization, p. 3 (http://books.google.com
/books?id=HIjsF0XONF8C&printsec=find&pg=PA3=gbs_atb#v=onepage&q&f=false) and Part II.
(http://books.google.com/books?id=HIjsF0XONF8C&printsec=find&pg=PP12=gbs_atb#v=onepage&
q&f=false)
4. ^ Jong, Henry W. de, and William G. Shepherd, Pioneers of Industrial Organization. Cheltenham, UK:
Elgar (2007). Description (http://www.e-elgar.com/Bookentry_DESCRIPTION.lasso?id=3125) and scroll
to chapter-preview links. (http://books.google.com/books?id=TpfrPPOFWUIC&printsec=frontcover&
source=gbs_atb#v=onepage&q&f=false)
5. ^ Lefteris Tsoulfidis (2009), "Competing Schools of Economic Thought”, Springer
(http://www.springerlink.com/content/978-3-540-92692-4)
References
Handbook of Industrial Organization, Elsevier:
Richard Schmalensee and Robert Willig, ed. (1989). v. 1. Links to description & contents
(http://www.elsevier.com/wps/find/bookdescription.cws_home/601119
/description#description) & (partial) chapter outlines. (http://www.sciencedirect.com
/science?_ob=PublicationURL&
_tockey=%23TOC%2324610%231989%23999989999%23565226%23FLP%23&
_cdi=24610&_pubType=HS&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&
_userid=10&md5=1c37e4a33f2dcd10872dbb19dbd222ef)
Richard Schmalensee , ed. (1989). v. 2. Links to description & contents
(http://www.elsevier.com/wps/find/bookdescription.cws_home/601120
/description#description) and chapter outlines. (http://www.sciencedirect.com
/science?_ob=PublicationURL&
_tockey=%23TOC%2324610%231989%23999979999%23565227%23FLP%23&
_cdi=24610&_pubType=HS&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&
_userid=10&md5=d6bb770217a7e64597c64d50a815aa81)
Mark Armstrong and Robert Porter, ed. (2007). v. 3. Links to description
(http://books.google.com/books?id=bvrn72h8dDwC) , chapter descriptions,
(http://www.elsevier.com/wps/find/bookdescription.cws_home/601121
/description#description) chapter outlines (http://www.sciencedirect.com
/science?_ob=PublicationURL&
_tockey=%23TOC%2324610%232007%23999969999%23667353%23FLA%23&
_cdi=24610&_pubType=HS&_auth=y&_acct=C000050221&_version=1&_urlVersion=0&
_userid=10&md5=a5b1e4caee2574c6b4cc7ba37c5de3f7) , and preview.
(http://books.google.com/books?id=bvrn72h8dDwC&printsec=find&
pg=PP7=gbs_atb#v=onepage&q&f=false)
8 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
Journals
9 of 10 2/22/11 3:15 PM
Industrial organization - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Industrial_organization#Structur...
10 of 10 2/22/11 3:15 PM