Neoclassical Theory of the Firm Flashcards
What is industrial economics?
The field of economics that studies firms, markets, and the well-being of consumers. It is the study of imperfect competition and provides the basis for regulation and competition policy
What does the structure of s firm include?
- number and size distribution of buyers and sellers
- entry and exit conditions
- product differentiation
- vertical integration
- diversification
What does the conduct of a firm include?
- business objectives
- pricing policies
- product design, branding and advertising
- R&D
- collusion
- mergers
Criticisms or SCP paradigm
- Empirical findings can be interpreted in different ways
- Strategic interaction has an important role
- Structure if market is endogenous
- There are measurement issues
Collusion hypothesis
The idea that the greater the market share, the greater the monopoly power, the greater the profit. This is the theory of SCP researchers
Effeciency hypothesis
Some firms have superior technology and talent and thus have larger size and profit. This implies that punishing the largest firms is punishing success
What is true when AC=MC?
They cross at the bottom of the AC curve so AC is minimised
If AC declines with q what is true?
There are scale economies or IRTS
What is a measure of scale economies?
S=AC/MC
Minimum efficient scale of operations
Lowest output level at which economies of scale are exhausted S=1
When do we get a natural monopoly
When fixed costs are very high Network externalities Governement regulation over entry Sunk costs Economies of scope
What are network externalities?
Consumers value products more if there are a larger number of users, this tends to induce higher concentration e.g PS4
What are economies of scope?
Multi product firms use the same resources for many goods, average costs may fall through diversification
Criticisms of neoclassical theory of the firm
- assumes firms operate in owners’ interest
- why do firms exist?
- corporate governance
