Chapter 10 - Market Structure Flashcards
market concentration
n = the number of firms
the lower the n, the more concentrated the industry is
Coefficient Cm
the sum of the market shares of the largest m firms
alternative to counting the number of firms
Herfindahl index
provides better measure of market concentration
difficult to compute: requires knowledge of the market share of all firms in the industry
using the price cost margin to compute market power
[p - MC] or [(p - MC)/p] or [(p - MC)/MC]
fine if all firms have the same costs
Lerner index
weighted average of each firm’s margin, with weights given by the firm’s market share
free-entry equilibrium
is characterized by a set of active firms such that
1) no active firm wishes to leave the market and
2) no inactive firm wishes to enter the market
due to increased price competition, the equilibrium number of active firms varies … than proportionally with respect to market size
less
increasing returns to scale
a firm in the left-hand side of the U-shaped average cost curve, that is a firm with decreasing average cost is said to operate under increasing returns to scale
Minimum efficient scale
way to measure the relation between increasing returns to scale and market structure
the minimum scale at which a firm’ average cost is, say within 10% of the minimum
when the unit cost is at its lowest possible point while the company is producing its goods effectively.
MES allows a company to compete more effectively since it can produce its goods efficiently at the minimum cost per unit
If both market size and MES increase by the same amount, then the equilibrium number of firms …
remain constant
coefficient of scale economies
alternative way of measuring increasing returns to scale economies
defined as the ratio of average cost over marginal cost: P = AC/MC
economies of scale
if P = AC/MC > 1
diseconomies of scale
if P = AC/MC < 1
concentration is generally greater the greater the minimum efficient scale (or the greater the degree of scale economies)
both the minimum efficient scale and economies of scale are instances of barriers to entry. Thus, concentration is greater the … the barriers to entry are
higher
first-mover advantage
service or product that gains advantage by being the first to market
sustainable competitive advantage
company assets that are difficult to duplicate or exceed; and provide a superior or favorable long term position over competitors.
some firms managed to transform a first-mover advantage into a sustainable competitive advantage
agglomeration economies
benefits that come when firms and people locate near one another together in cities and industrial clusters (Silicon valley)
why does history matter?
the particular historical details of the evolution of an industry may in some cases determine the long-run market structure in ways that go beyond simple technology determinants
In order to enter a big industry with the already well-established firms, a new entrant would need to pay a much higher entry cost than an entrant into a smaller industry. When advertising is an important part of a firm’s strategy, …
entry costs are endogenous
if a lottery is used, then the only entry cost F is an
exogenous cost
if the license is auctioned, then the total entry costs are given by F+B (the bid for the license) an
endogenous cost
if entry costs are endogenous, then the number of firms is … sensitive to changes in market size
less
the more intense market competition is, the lower the number of equilibrium firms
the intensity of competition has an effect on market structure: if competition is close to Bertrand, then the tendency is for the number of competitors to decrease; if competition is close to monopoly, then the tendency is for the number of competitors to increase
Lerner index = H / -ϵ
ϵ is the industry price elasticity of demand and H is Herfindahl index
this formula generalizes the idea that the greater concentration is (as measured by H), the greater the degree of market power (as measured by L)
(SCP paradigm)
Structure -> Conduct
example: small number of firms and similar firms facilitate collusion
(SCP paradigm)
Conduct -> Performance
the more competitively firms behave, the lower the degree of market power and the greater the allocative efficiency
(SCP paradigm)
Structure-Performance hypothesis
the more concentrated the industry is, the greater the degree of market power (positive relation)
collusion hypothesis
concentration implies market power through increased collusion between firms
efficiency hypothesis
the increase in market power is mainly associated in productive efficiency (alternative interpretation for the positive relation between structure and performance)
excessive entry
free entry can result in excessive entry
business stealing effect
the profits earned by the entrant are stolen from the incumbent firms.
a transfer between firms which does not correspond to a benefit to society (although obviously it benefits entrants)
Area A
product differentiation and free entry
If product differentiation is very important, or if competition is very fierce, then free entry implies insufficient entry from a social point of view. If conversely, product differentiation is unimportant, and competition is soft, then the business-stealing effect dominates, whereby the free-entry equilibrium entails excessive entry.
