Summary Industrial Organization

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Industrial Organization: Content overview:
Part 1: Theoretical foundations:
• Chapter 1: Industrial Organization: an introduction: Chapter 1-An introduction-

A perfectly competitive industry has 6 main characteristics: 1) large number of buyers and sellers 2) producers and consumers have perfect knowledge 3) the products sold by firms are identical 4) firms act independently and aim at maximizing profits 5) no entry or exit barriers 6) firms can sell as much output as they want at the current market price NEOCALSSICAL THEORY: Static conception, focus on long-run According to Schumpeter and the Austrian School, the fact that a firm earns an abnormal profit (monopoly) profit does not constitute evidence that the firm is guilty of abusing its market(monopoly) power at the expense of consumer: entrepreneur, creative destruction monopoly status is only a temporary phenomenon competition is a dynamic process Disequilibrium reflects imperfect information or ignorance on the part of buyers and sellers!! Structure-Conduct-Performance (SCP) Paradigm Structure is the central element. It influences conduct which in turn has an effect on the performance STRUCTURE Number and size of firms, entry conditions, product differentiation, vertical integration, diversification; fixed int he short-run CONDUCT Business objectives, pricing, design and branding, advertising and marketing, R&D, collusion, merger; refers to the behaviour of a firm PERFORMANCE Profitability, growth, quality of products and services, technological service, productive and allocative efficiency; Chicago School about abnormal profit: causes may be cost advantage and superior efficiency

STUDY CASE: EUROPEAN BANKING To prevent from damaging implications for consumer welfare, there can be interventions of the government. The government policy is regulatory intervention to promote competition and prevent abuses of market power preventing a horizontal merger, break up of a large incumbent producer price controls, punishment of unlawful collusions

Policy measures are fiscal policy, macroeconomic policies and so on

employment

policies,

environmental

policy,

The Chicago School is a group of prominent academic lawyers and economists, whose promarket, pro-competition and anti-government views were perhaps of their most influencial during the 1970’s and 80’s

Critics of the SCP Paradigm the theory does not always specify precise relationships between S, C, P variables it is often difficult to decide which variables belong to which category performance is only some measure of the degree of success in achieving desired goals the definition of market or industry structure has a number of dimensions danger of overemphasizing the role of concentration little comprehensive information is available on more subtle aspects of market structure and essentially no systematic data aside from accounting profit rates is available on conduct and performance relationships are oftein quite weak in terms of statistical significance no explanation is offered as to the evolution of the market structure variables, and the influence of the current conduct and performance on future structure according to the collusion hypothesis, a positive association between concentration and profitability was interpreted as evidence of collusion or other abuses of market power designed to enhance profit according to the efficiency hypothesis (Chicago), a positive relationship between concentration and profitability reflects a natural tendency for efficient firms to be successful and to become dominant in their industries Strategic management: 5 forces model 1) Extent and intensity of competition 2) Threat of entrants 3) Threat of substitute products and services 4) Power of buyers 5) Power of suppliers Porter’s approach: static, underemphasises the problem of uncertainty caused by change in the competitive environment, competitive advantage is measured by the value the firm is able to create...
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