1. INTRODUCTORY REMARKS SEPTEMBER 2005
INDUSTRIAL ECONOMICS
INTRODUCTORY REMARKS
SEPTEMBER 2005
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2. 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)
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3. ORTHODOX MICRO /2 WELFARE ASPECTS
Model of the firm; pricing and output implications
Perfect competition
Monopoly
Cournot
Monopolistic competition
Managerial models
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4. 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
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5. 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!
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6. 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
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7. 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.
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8. 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.
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9. So what is conduct? Pricing decisions Advertising R&D spending
Marketing strategies
ALL OF THE ABOVE CAN BE BOTH STRUCTURAL OR STRATEGIC
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10. 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)
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11. What is performance? Profitability Efficiency Product quality
Technical progress
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