Chapter 1 - What is Industrial Organization? Flashcards
Industrial organization is concerned with…
… the workings of markets and industries, in particular the way firms compete with each other
Market power
the ability to set prices above cost, specifically above incremental or marginal cost
Is there market power? (Chicago school)
Chicago school of economics: “As long as there is free entry into the industry, the extent of market power is never significant.”
There exists some industries where market power exists to a significant extent
How do firms acquire and maintain market power?
market power = higher profits
firm strategy
patents (can expire)
What are the implications of market power?
allocative inefficiency
productive inefficiency
rent seeking
allocative inefficiency
sales lost due to high prices for consumers who were willing to pay the marginal cost but not the set price
productive inefficiency
increase in cost that results from market power
no incentive to be cost efficient
rent seeking
economic concept that occurs when an entity seeks to gain wealth without any reciprocal contribution of productivity
public policy and market power
can be divided into two categories:
- regulation
- antitrust policy
Chicago school - government intervention
in a world free of competition, market power is never very significant
government intervention creates market power
Industrial policy
focuses on strengthening the market position of a firm or industry, namely with respect to foreign firms
Structure-conduct-performance (SCP) paradigm
- Aspects that characterise market structure (no of buyers and sellers,…)
- Typical conduct of the firms in the industry (pricing, advertising,…)
- Estimate the performance of the industry (competitiveness, efficiency,…)
-> causal chain between the different components: market structure determines firm conduct, which in turn determines industry and firm performance
