INDUSTRIAL ECONOMICS

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INDUSTRIAL ECONOMICS

• INTRODUCTORY REMARKS
• SEPTEMBER 2005

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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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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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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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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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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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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 RD investments to be
  undertaken and to be successful.

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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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So what is conduct?

• Pricing decisions
• Advertising
• RD spending
• Marketing strategies
• ALL OF THE ABOVE CAN BE BOTH STRUCTURAL OR
  STRATEGIC

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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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What is performance?

• Profitability
• Efficiency
• Product quality
• Technical progress