INTRODUCTORY REMARKS SEPTEMBER 2005 INDUSTRIAL ECONOMICS INTRODUCTORY REMARKS SEPTEMBER 2005 13/11/2018

ORTHODOX MICRO /1 Market allocative mechanism Firms & consumers behaviour for ‘ideal’ operation Normative, top down theory Does not answer policy-related questions (market-abuse limitation, merger policy etc) 13/11/2018

ORTHODOX MICRO /2 WELFARE ASPECTS Model of the firm; pricing and output implications Perfect competition Monopoly Cournot Monopolistic competition Managerial models 13/11/2018

STRUCTURAL APPROACH Bain and the Harvard School and the S-C-P paradigm Structural characteristics of the market determine the behaviour of firms which in turn determines their performance Similar welfare implications Particular to general, inductive and empirical approach The focus is the industry (market) instead of the firm 13/11/2018

Chicago School Demsetz questions the causality in the SCP model of large firms leading to big profits Well run and efficient firms become both large and earn big profits Policy implications are completely different to those of the SCP approach; if profits are the reward for efficiency then penalties on the former discourages the latter! 13/11/2018

Other approaches /1 Austrian ; allocation of resources determined by the ‘votes’ of the consumers given their ability to spend If the entrepreneur guesses correctly what the consumers want he gets a lot of the ‘votes’ (profits) Hence large profits are the essential ingredient for the market to adjust to the consumers wishes 13/11/2018

Other approaches /2 Schumpeterian: Big firms are essential for innovation and in particular for large technological leaps: they have both the ability and the willingness to spend big money for major projects. Large market size means market power; but this is needed for the large R&D investments to be undertaken and to be successful. 13/11/2018

ORTHODOX THEORY REVISITED Markets are imperfect because information is imperfect. Introducing imperfect information and the use of game theory provides a foundation for strategic behaviour (conduct!) by the firms. Equally in the context of shareholders and managers in managerial models behaviour can be explained using the principal-agent theory. These theoretical developments are the re-birth of the orthodox theory and constitute the theoretical foundations of the new Industrial Organisation. 13/11/2018

So what is conduct? Pricing decisions Advertising R&D spending Marketing strategies ALL OF THE ABOVE CAN BE BOTH STRUCTURAL OR STRATEGIC 13/11/2018

Feedback mechanisms Structure determines conduct, but there is also a feedback mechanism: E.g. successful strategies by a firm eliminate rivals and make the market more concentrated Government policy and competition legislation in the form of antitrust and regulation seeks to affect both Conduct of firms may affect government policy (e.g. lobbying) 13/11/2018

What is performance? Profitability Efficiency Product quality Technical progress 13/11/2018