Market Structure Conduct Performance (Scp)

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Market Structure Conduct Performance (SCP) Hypothesis Revisited using Stochastic Frontier Efficiency Analysis

Seanicaa Edwards 204 Lloyd-Ricks, West Wing Dept of Agricultural Economics MSU, Mississippi State, MS-39762 Phone: (662) 325 7984; Fax: (662) 325 8777 E-mail: see3@.msstate.edu

Albert J. Allen 215 G Lloyd-Ricks, West Wing Dept of Agricultural Economics MSU, Mississippi State, MS-39762 Phone: (662) 325 2883; Fax: (662) 325 8777 E-mail: allen@agecon.msstate.edu Saleem Shaik 1 215 E Lloyd-Ricks, West Wing Dept of Agricultural Economics MSU, Mississippi State, MS-39762 Phone: (662) 325 7992; Fax: (662) 325 8777 E-mail: shaik@agecon.msstate.edu

Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Long Beach, California, July 23-26, 2006

Copyright 2005 by Seanicaa Edwards, Albert J. Allen and Saleem Shaik. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. 1

Corresponding and Senior Author

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Market Structure Conduct Performance (SCP) Hypothesis Revisited using Stochastic Frontier Efficiency Analysis

Abstract Use of efficiency measures as a proxy for performance to test the market structureconduct-performance (SCP) hypothesis is explored. Utilizing Battese and Coelli specification, we estimate stochastic frontier production function and SCP equations with output and efficiency measures as endogenous variables. An empirical application to U.S. trucking carries over the period 1994-2003 with emphasis on the agricultural commodity and refrigerated food products carriers is examined. Results reveal that the variables average haul, average load and market concentration significantly affected the efficiency of firms with 2-8 number of years within each firm.

Market Structure Conduct Performance (SCP) Hypothesis Revisited using Stochastic Frontier Efficiency Analysis Market structure conduct and performance (SCP) framework was derived from the neoclassical analysis of markets. The SCP paradigm was the brain child 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 lead to the implementation of most anti-trust legislation. This was followed by the Chicago school of thought from 1960-80. They emphasized on the rational for firms becoming big, price theory and econometric estimation. During 198090 game 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 lead to complex empirical modeling of technological changes, merger analysis, entry-exit and identification of market power. There are two competing hypotheses in the SCP paradigm: the traditional “structure performance hypothesis” and “efficient structure hypothesis”. 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. More specifically, the standard SCP paradigm asserts that there is a direct relationship between the degree of market concentration and the degree of competition among firms. This hypothesis will be supported if positive relationship between market concentration (measured by concentration ratio) and performance (measured by profits)

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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...
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