Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECON > 07 - The Nature of Industry > Flashcards

07 - The Nature of Industry Flashcards

1
Q

Market Structure

Structural differences among industries in a market.

A 
Factors such as:
Number of firms
Relative size of firms - concentration
Technical and cost conditions
Demand conditions
Ease of entry/exit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Concentration

A

The number and relative size of firms in an industry.

Are there many small firms or just a few large firms?

The Four-Firm Concentration Ratio and Herfindahl-Hirschman Index (HHI) help illustrate concentration in an industry.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Four-Firm Concentration Ratio

A

The fraction of total industry sales produced by the four largest firms.

Equivalently, the sum of the market shares of four largest firms.

Most popular ratio but crude representation. It ignores firms after the 4th. Industry of 5 and 50 firms could have same ratio eg.

Ratio closer to 0 means many firms
Ratio closer to 1 means fewer firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Herfindahl-Hirschman Index (HHI)

A

The sum of the squared market shares of ALL firms in an industry, multiplied by 10,000.

By squaring before adding, large firms are given more relative weight in the assessment.

Ratio range is 0 - 10,000

Closer to zero means many small firms
Value of 10,000 means a single firm.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

C4 vs HHI

Limitations

A

C4 only considers 4 largest and HHI includes all firms. HHI places greater weight on relatively larger firms.

Census Bureau only reports on top 50 firms so raw data for HHI may not be complete.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Concentration ratio limitations

A

Results of C4 and HHI may be over stated if global companies participate in relevant market.

Results may be under stated if there are many national and regional firms but only a few or one local firm is relevant to buyers. Local utilities are example.

Broad or narrowly defined product classes can skew results. Many beverages classified as soft drinks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Technology implications

A

Some industries depend more on labor while others depend more on technology. Comparing ratios of sales per employed person describes level of tech dependency between industries.

Within an industry, a firm with tech not available to competitors will dominate the industry.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Demand and Market Condition implications

Level of:
Demand
Information
Elasticity

A

Low demand markets may only sustain a few firms. Large demand markets may require many firms to produce adequate supply.

Informed customers increases competitiveness in market.

Many substitutes leads to high elasticity and more competitive environment. The product elasticity of demand for unique products will be close to elasticity of market demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Monopolized Industry Demand

A

The elasticity of product demand is equal to the elasticity of market demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Rothschild Index

A

A measure of the sensitivity to price of the product group as a whole relative to the sensitivity of the quantity demanded of single firm to a change in its price.

The elasticity of demand for total market over elasticity of demand the product of single firm.

Values between 0 and 1
Closer to 0 means EOPD > EOMD.
Closer to 1 means EOPD near = EOMD.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Potential for Entry/Exit

A

Barriers to Entry:
Explicit costs such as capital investments.
Patent protections
Economies of Scale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Industry Conduct

Conduct differences of industries.

A

Industries vary by:

Markup - pricing behavior

Susceptibility to mergers and takeovers

Investment in:
Marketing
R&D
Product development

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Lerner Index

A

A measure of pricing behavior.

Measures the difference between price and marginal cost as a fraction of the price of the product. L= (P-MC)/P

Range 0 - 1

Closer to 0 when firms set price close to MC
Closer to 1 when firms set higher prices

Closer to 0 means more competition.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Markup Factor

A

The factor by which MC is multiplied to derive price of the good.

If Learner Index is 1/2, then the markup factor is 2.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Merger and Integration activity

A 
Integration results in fewer firms -
Motivated by desire to gain:
Economies of scale or scope
Reduce transaction costs
Increase market power
Gain better access to capital markets

Mergers may be friendly or hostile

Vertical
Horizontal
Conglomerate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Vertical Integration

A

Various stages (phases) of product production carried out within single firm.

May take place by merging with suppliers or customers.

Usually driven by desire to reduce transaction costs.

17
Q

Horizontal Integration

A

Merging of multiple similar final products into single firm.

Main motivations are:

Gain savings of economies of scale and scope.

To increase market power.

The social benefits of increased efficiency must be weighed against increase in market power which reduces competition.

18
Q

Federal Trade Commission and the Antitrust Division of the U.S. Dept. of Justice

Horizontal Merger Guidelines

A

HHI > 2500 Highly Concentrated
HHI < 1400 U concentrated

HHI > 2500 and incr > 200 - highly likely
HHI 1500-2500 and incr. 100-200 possible
HHI > 2500 and incr. 100-200 possible

19
Q

Antitrust suit decision factors

A

Suit may NOT be filed if:
Evidence of significant foreign competition
Emergence of new technology
Increased efficiency at high market benefit
One or more parties in financial crisis.

Suit MORE likely if:
Great increases in scale that significantly increase barriers to entry.

20
Q

Conglomerate Merger

A

Integration of different product lines into a single firm.

Motivated by:
Improved cash flows in cyclical demand markets. Should be last resort move.
Leveraging the superior performance of an exceptional CEO.
Capitalize on distribution and supply chain commonalities.

Cons : reduction in specialization

21
Q

Research and Development
And
Advertising

A

R&D is means to achieve technological advantage and securing patents.

Firms may be evaluated by the ratio of R&D (or adv.) spending to sales.

22
Q

The Nature of Industry can be described in 3 broad terms.

A

Structure

Conduct

Performance

23
Q

Industry Performance

A

As measured by profits and social welfare in an industry.

24
Q

Profits

A

Profits are independent of sales revenue. Big firms do not automatically make big profits.

One if the measures of industry performance.

25
Q

Social Welfare

A

The combined impact of consumer and producer surplus.

Both consumer and producer surplus represent value for the market.

One of the measures of industry performance.

26
Q

Dansby-Willig (DW) index

A

Measure of how much social welfare (consumer + producer surplus) would improve given an increase of output. Range 0 - 1

Closer to 0 means little increase in welfare. Surplus is maximized to begin with. Low values mean good performance.

Closer to 1 means great increase in welfare with more production. High values mean poor performance.

27
Q

Structure - Conduct - Performance overview and wholistic paradigm.

A

Structure:
Concentration, Technology and Market Conditions

Conduct:
Pricing, Marketing and R&D decisions

Performance:
Profits and Social Welfare in a market.

All factors integrally related in Structure-Conduct-Performance Paradigm.

28
Q

Causal View

A

Simple measure of the SCP paradigm.

Asserts that market structure CAUSES resources to be allocated in ways that lead to GOOD or POOR performance and thus high or low social welfare.

A highly concentrated industry creates market power with low competition leading to higher prices which then reduce social welfare.l

A one way causal explanation. Too simple.

29
Q

Feedback Critiques

A

A more commonly accepted measure of the SCP paradigm.

Any state of structure, conduct or performance can impact the nature of the other two.

eg. Low pricing regardless of concentration my inhibit further entry.

30
Q

Structure - Conduct - Performance assessment per the Feedback Critique relationship with the Five Forces Framework,

A

The five forces of Entry, Supplier and Customer Power, Rivalry and Substitution and Complements capture elements of the Structure and Conduct of firms. The level and growth of sustainable profits are akin to the elements of performance.

31
Q

Perfect Competition

A 
Many firms
Firms small relative to market
No technological advantages
Produce homogeneous product mix
Many substitutes
No market power
No single firm's action have impact on market
Concentration and Rothschild indices close to zero.
32
Q

Monopoly

A 
A single firm environment
Restriction of supply
Pricing above marginal cost
C4 = 1
HHI = 10,000
Rothschild = 1 or unity
33
Q

Monopolistic Competition

A

Many firms and customers
C4 and HHI close to zero
Differentiated products
High advertising expenditures

34
Q

Oligopoly

A

A few firms dominate the market.
Conduct of one firm impacts the other firms resulting in mutual interdependence.
All decisions made in the context of possible competitor reactions an subsequent decisions.

ECON (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions