L12: Measuring Market Power Flashcards
2 main approaches
structure-conduct-performance (SCP)
- accounting data on profits and cost
- studying relationship between profitability and market structure
new empirical industrial organisation (NEIO)
- using model estimate demand and marginal cost
structure-conduct-performance (Bain, 1956)
causal and stable relationship between market structure - firms’ conduct - firms’ performance
conduct is hard to observe so typically focus on how structure affects performance
working assumptions of SCP
stable relationship from structure to performance
- if the relationship is established, the structure eases exercise of market power
market power can be measured from available data
SCP measurement
market performance
- rate of return on investment
- price cost margin
- tobin’s Q (market value/book value which is total assets the firm has)
concentration
- herfindahl-hirschmann index (HHI) which is 10000 x sum of all the market share squared
- concentration ratio which is the sum of market share of the biggest m firms
entry conditions
- EOS and MES as a proxy
- product differentiation
- absolute cost advantages
critiques of SCP
measurement issues for profitability
- accounting data likely misrepresents profits
- accounting vs economic treatment of depreciation
- hard to measure MC for price-cost margins
market definition
- often use industry codes
conceptual and interpretation issues
- short run vs long run
- positive correlation between concentration and profits (not always true that higher profits make consumers worse off)
- hard to establish causal relationship since market shares, concentration and profits are all endogenous
- symmetry across industries
new empirical industrial organisation (Bresnahan, 1989)
doesn’t use accounting data to avoid measurement issues
studies focus on a single industry to avoid assuming symmetry
firm behaviour based on oligopoly models
