ECONOMICS 3200M Lecture 10 February 6, 2006

1
ECONOMICS 3200MLecture 10February 6, 2006
2
Test Friday, February 10 1245-215
3
You are responsible for chapters 1-8 in the text
book. This is an open book test.
4
There will be no class on Monday, February
20.Have a great Reading Week.
5
Structure-Conduct-Performance

• Performance of firms (profits, prices) in
  industry depends upon conduct of buyers and
  sellers which in turn depends on structure of
  market
• Measures of performance profitability
• Price-cost margin ?/PQ 1/?
• Rate of return on assets ?/(DE)
  (?/PQ)PQ/(DE)
• Rate of return on equity ?/E
  ?/(DE)(DE)/E
• Does performance determine structure?
  successful/lucky firms dominate

6
Structure-Conduct-Performance

• Market structure and conduct
• Definition of market geographic, product
  dynamic scope
• Industry competitors intensity of rivalry
• Determinants of rivalry
• Industry growth
• Intermittent overcapacity
• Product differentiation
• Switching costs
• Concentration and relative market shares
• Informational complexity
• Diversity of competitors
• Threat of entry

7
Structure-Conduct-Performance

• Threat of entry
• Entry barriers economies of scale, proprietary
  product differences, brand identity, switching
  costs, capital requirements, sunk costs, access
  to distribution, absolute cost advantages,
  government regulations
• Threat of retaliation by incumbents
• Bargaining power of suppliers
• Switching costs of suppliers
• Presence of substitute inputs/suppliers
• Supplier concentration sole sourcing
• Costs relative to total purchases
• Impact of inputs on costs or differentiation
• Threat of forward integration relative to threat
  of backward integration -- internalization

8
Structure-Conduct-Performance

• Bargaining power of buyers
• Bargaining leverage
• Buyer concentration vs. supplier concentration
  monopsony, bilateral monopoly
• Buyer volumes
• Buyer information
• Ability to integrate backward internalization
• Substitute products
• Price sensitivity
• Product differences
• Brand identity
• Impact on quality/performance/costs
• Decision makers incentives

9
Strategic Behaviour

• Set of actions a firm takes to influence market
  environment (structure and conduct) and increase
  profits (performance)
• Not static as in structure-conduct-performance
  paradigm
• Economic rents motivate firms/agents
• Market environment factors that impact
  performance intensity of rivalry, threat of
  entry, bargaining power of buyers/suppliers,
  substitutes
• Cooperative strategic behaviour
• Coordinate actions with rivals to limit intensity
  of rivalry
• Not necessarily across all strategic variables
  (instruments)
• Non-cooperative strategic behaviour
• Develop/implement competitive strategies to
  gain/maintain competitive position relative to
  rivals to enhance performance
• Affect conduct (including inducing cooperative
  behaviour with respect to subset of instruments,
  change structure to improve performance

10
Strategic Behaviour

• Competitive strategy to be successful
• Act before rivals or learn from mistakes of
  rivals
• Deter entry
• Difficult to imitate time lags
• Commitment to strategy, as long as it appears to
  be correct
• Generic strategies
• Cost leadership
• Differentiation
• Niche

11
Strategic Behaviour

• Cost leadership
• Timing first mover advantages
• Economies of scale/scope
• Learning
• Technology development, adoption
• Human resource management
• Internalization vs. external transactions
• Procurement, logistics supply chain management
• Production scheduling inventories, maintenance,
  capacity utilization
• Geographic location
• Bargaining leverage
• Mix and variety of products, product
  configuration/performance/features

12
Strategic Behaviour

• Cost leadership
• Risks
• Cost leadership not sustainable competitors can
  imitate quickly, technology developed externally,
  globalization (new competitors, sources of supply
  of inputs)
• Proximity in differentiation lost cannot ignore
  basis for differentiation
• Cost focusers achieve lower costs in selected
  segments

13
Strategic Behaviour

• Differentiation
• Quality and motivation of employees human
  resource management
• Quality, reliability, design
• Range of product line
• Service, including credit (case of GE)
• Delivery, logistics
• Distribution channels
• Advertising

14
Strategic Behaviour

• Differentiation
• Buyer value lower costs, enhanced performance
  for products
• Buyer perception of value
• Signaling criteria reputation, image,
  packaging, appearance of facilities, time in
  business, market share, parent company identity,
  customer list
• Risks
• Differentiation not sustained competitors
  imitate, basis for differentiation becomes less
  important for buyers
• Cost proximity lost cannot ignore costs
• Differentiation focusers achieve greater (more
  valuable) differentiation in select segments
• Too much differentiation uniqueness not
  valuable, too large a price premium

15
Strategic Behaviour

• Focus/niche differentiation/costs in select
  market segments
• Risks
• Focus strategy easily imitated
• Target segment becomes structurally unattractive
  demand declines, entry
• Broadly-targeted competitors overwhelm segment
  segments differences from other segments
  narrows, advantages of broad line increases
• New focusers sub-segment the market
• lower cost focusers enter the market