Contemporary Industrial Markets (CIM) Almira Yusupova yusupova@ieie.nsc.ru Class 1 21.02.2014

Almira Yusupova (Юсупова Альмира Талгатовна) IEIE SB RAS, NSU Courses: Industrial Economics, Contemporary Industrial Markets, Economic Nature of Leasing, International Business; Research interests: - leasing, industrial markets in Russia, innovative entrepreneurship yusupova@ieie.nsc.ru

Case: Mega Perspectives of Nanotechnologies

1 – financial resources 2 – technology, intellectual property, key competencies; 3 – nano modifiers 4 – technology and guidance

Questions to discuss Main risks, advantages and disadvantages of the “Establishing new enterprise” strategy Other schemes of commercialization

Course Format - classes on Fridays; - all materials in “Econom” system; - Assessment: Assignment on leadership analysis with presentations (10 points); Final exam – paper analysis (10 points); Corse is supposed to be finishes at the end of March

Industrial Economics Industrial Organization

Topics under Discussion Models of firms’ behavior of firms and industrial organization of contemporary markets; Related policy issues, competition policy; Applications of basic models and limitations of the theory;

Definition of Industry (industrial market) Set of firms producing substitutes; Competition between these firms either exists or is possible in short term or long term period.

Importance of Definition: if industrial market is determined incorrectly Government Wrong direction of state support;(too broad market – support becomes too diffused, too narrow – artificial disproportions ) Ineffective antitrust regulation; (too broad market – growth of monopolies, too narrow – difficulties for emerging firms);

If industrial market is determined incorrectly Firm: New market entrance – too broad market - high possibility to loose promising area; too narrow – wrong analysis of competitors)

Give examples of new markets Why did they appear?

Market Structure Analysis Basic paradigm Structure-Conduct-Performance Edward Mason (1930), Joseph Bain (1950) Firm’s conduct is related to market structure and influences on the performance of that market;

Market Structure Conduct Performance

Theoretical Aspect: Importance of Market Structure Each firm operates at industrial market. Market structure influences directly on firms’ decisions, behavior models and results. Empirical evidence of the idea of Structure – Conduct – Performance scheme.

Types of Market Structure Perfect competition Imperfect competition competition Monopoly Oligopoly

Case analysis: discuss possible directions of companies development

IT company in east England – successful development; Initial case – success story Companies’ office employed 30 employees. . Company’s activities: administrating and monitoring of remote systems, technical support of clients regardless their location. Many problems were solved with the help of Internet. Consumers got qualified support and had an opportunity to reduce labor costs. Problem – support business growth and avoid high overheads related to administration. Decision : Outsourcing . Efforts should be put in profitable activities only. Finance (non key issues), HR and marketing were committed to reliable partners. Special detailed scheme was elaborated. Result : Great success. Main attention was paid to partners’ selection. All contractual, financial and technical issues were studied and discusses. All expectations were defined and taken into account. 100% growth ob sales during one year;. Possible ways of development : - Work with existing clients and increase their number; - Create joint venture on outsourcing;

Market concentration; Large corporations’ positions

Concentration Important indicator of market structure Concentration - competition – opposite characteristics; Quantitative estimation;

Requirements to concentration indicators: Convenience for calculation and interpretation; Relevance to any market (regardless size); Meaning from 0 to 1; Graphical illustration; Sales transfer reflection; Entry-exit reflection; M&A reflection;

CRn = Concentration Ratio n<N; CR4, CR8, CR20, CR50 Different criteria for rating CR1 matters; ,

Herfindahl – Hirschman index HHI = Antitrust policy; Maximum 1 or 10000; Relation to variance;

Conventional Limits HHI < 1000 – low concentration; 1000 < HHI < 1800 – moderate concentration; HHI > 1800 – high concentration;

Lerner Index – market power indicator; L = (P-MC)/P, where: P – price; МС marginal costs; Percept competition - minimum 0; Only one firm (monopoly); Li = (P-MCi)/P Weighted average; Many interpretations;

Concentration – Competition – opposite characteristics Which structure is better?

Competition Motivation for better resources utilization; Effective mechanism for market coordination;

Importance of Competition Assessment Competition development– criterion for decision making; Indicator for economic policy; Foundation for institutional development;

Classic Approach SCP paradigm: Higher concentration – lower competition (barriers, prices); Connection between concentration and market power Variety of interpretations;

Alternative Approach J. Sutton’s theory– competition determines concentration Higher competition - lower motivation to enter the market – higher concentration; Competition estimation;

Competition on Russian markets Perceptions of market participants Number of studies on the level and role of competition

Ambiguity of Results Controversial role of competition: long term period – increase of profitability; short-term period – decrease of profitability, financial instability; Rational firm’s behavior – obtain dominant position;

Russian Markets http://www.hse.ru/data/2011/04/05/1211687919/A_D_K_Yu.pdf Foreign trade turnover 45% GDP, Many domestic companies take part in global competition: as exporters on foreign markets or on domestic markets with importers;

Competition on Russian Markets? Most companies feel competition; At the same time 10-20% companies don’t pay attention on competition (mid- 2000s); Result doesn’t depend on the type of industry (regulated industries) One third – strong competition with domestic and foreign firms; 2009 - great influence of competition was marked by 80% of companies (HSE study of processing industry);

Main Competitors of Russian Firms (survey data) - Russian companies; - Import; - Foreign firms' subsidiaries in Russia Integration helps to resist competition;

Competition Influence: Foreign competitors: active restructuring – new products, technologies, marketing; Domestic competitors: passive restructuring– employment, phasing out unprofitable products; Requirements to institutional environment - fair competition, access to financial resources;

Competition Influence: Innovations ! Inverse U curve – relations between innovations and competition; Two effects: positive on motivation and negative on profit (as main source of finance) Excess competition; Differences between old and new companies;