Structure-Conduct-Performance Industrial Economics.
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Transcript of Structure-Conduct-Performance Industrial Economics.
![Page 1: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/1.jpg)
Structure-Conduct-Performance
Industrial Economics
![Page 2: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/2.jpg)
Objectives
• Look at what factors make market power a ‘problem’
• What is the evidence on market power?– How do we test?– The deadweight welfare loss triangle
• Harberger
• Posner
• Cowling & Mueller
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Oligopoly Models
• Dominant firm models. • Models of potential competition and entry
deterrence. • Models of co-operative oligopoly.• Models of non-co-operative oligopoly such as the
Cournot model • Models of oligopoly with product differentiation. • Models of the interaction between vertically related
firms with market power.
![Page 4: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/4.jpg)
When is market power most likely to become a 'problem' by allowing firms to
earn 'excess' profits and/ or creating a social welfare loss?
• Existence of a dominant firm. • Barriers to entry. • Firms are price takers and quantity makers• Existence of conditions conducive to collusion.
![Page 5: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/5.jpg)
Conditions are conducive to collusion when ...
• Firms are few in number and roughly equally sized
• The product is roughly homogenous.• Demand is slow growing and stable.• Cost conditions are similar amongst firms.• Fixed costs are a small proportion of total cost.• Assets are highly function specific.• Its is easy to act against cheats.
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Testing the relationship
Profits = f (conc., entry barriers, product differentiation, exit costs)
Is the relationship linear and continuous, or non-linear and discontinuous?
Should we be estimating a single equation model or a simultaneous equation model?
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Results
• In 14 out of 98 investigations in one period by the MMC profits were found to be 'excessive'.
![Page 8: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/8.jpg)
Does this mean anything
• Not according to the Chicago critics of the SCP paradigm.
They argue as follows:
Market power and above normal profits are not in fact causally related but are both products of a common force which is the superior competitive ability of some firms over others.
![Page 9: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/9.jpg)
The Welfare loss triangleaka the Harberger triangle
W = TR PCM2
Harberger concluded in 1954 that the losses arising from market power in the US economy were very small, less than 0.1% of GNP.
![Page 10: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/10.jpg)
Was Harberger Right?
Probably not because
• his 'estimate' for (the elasticity of demand) was -1 which is inconsistent with profit maximisation.
• If we use the Lerner index for market power and substitute it into Harberger's expression we get the result that the loss is equal to half of all above normal profits!
![Page 11: Structure-Conduct-Performance Industrial Economics.](https://reader035.fdocuments.us/reader035/viewer/2022071706/56649d355503460f94a0c635/html5/thumbnails/11.jpg)
What do others say?
• Scherer
• Posner
• Cowling & Mueller