structure performance conduct module

Topics: Economics, Microeconomics, Perfect competition Pages: 5 (1874 words) Published: August 29, 2014
The SCP paradigm assumes that the market structure determines the conduct of the organization. This conduct, in turn, is the determinant of market performance. Examples of market performance include efficiency, profitability and growth. The framework seeks to establish that certain structures of the industry can lead to certain kinds of conduct or behaviour which then leads to various types of economic performance. The SCP paradigm was developed through evaluation of empirical studies involving American industries. Theoretical models were not used to support the paradigm. The conclusion that was drawn from empirical studies was that market structure determined performance. This is caused by the belief that the laws of competition should not be based on behavioural models but rather on structural remedies. According to J.S. Bain who developed the paradigm in the 1950s, most industries became concentrated than necessary (Ferguson & Ferguson, 1994). In concentrated industries, there are high barriers to entry. New firms cannot enter these markets that easily. The SCP approach has been subjected to criticism in the recent years. Some critics say that the relationships between structure, conduct and performance are more complicated than originally thought (Ferguson & Ferguson, 1994). Attempts are being made to link the framework back to the neoclassical theory. However, industrial organizations still use the SCP approach for analysis and as a tool in policy formulation. The SCP paradigm remains to be a basic tool used by industrial organizations in competition analysis. Structure is defined as the components and characteristics of the various markets and industries in an economy. Structure also involves the different sectors of the economy. In the SCP approach, structure is described as the characteristics and relevance of individual markets operating within the economy (Papatheodorou, 2006). It provides a description of the environment in which organizations operate within a specific market. The said structure can be identified by considering the size and number of buyers and sellers in the market. The structure can also be identified based on product differentiation, market barriers and the extent of integration or diversification of firms. Conduct in the SCP approach involves all actions and behaviour of organizations regarding the decisions being taken and the reasons behind them. Conduct focuses on how organizations set prices. Organizations will have to determine whether these prices are in collusion with other firms in the market (Perloff et. al., 2007). Industrial economists are concerned with the performance of organizations. Firms should be able to identify whether their activities and operations will improve economic welfare. Firms should also satisfy and meet customer demands within a specific period. The SCP approach helps organizations analyse whether their processes and products are produced efficiently. Organizations should determine whether the allocation of resources is efficient and effective. The right approach is not to waste resources and produce the right products in just the right quantities. Firms should also look at the other aspects of performance like the relationship between price and cost of product as well as the profits earned (De Jong & Shepherd, 2007).

In the current market, consumer tastes do not change that much. Producers and consumers are said to be perfectly informed. Because of the market conditions, the economic welfare can be maximized using the Pareto analysis in which marginal conditions are expected to be fulfilled. Under marginal conditions, firms are expected to set prices so that they will be equivalent to marginal cost. Using the neoclassical perfect competition model, firms can maximize their profits by ensuring that price will equal marginal cost. This will result in an effective combination of price and output (Ferguson & Ferguson, 1994). The SCP approach states that...
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