ECN-337 (Industrial Org.) Chapter 1 Notes - Chapter 1 Introduction The field of Industrial Organization developed as an offshoot of traditional

ECN-337 (Industrial Org.) Chapter 1 Notes - Chapter 1...

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: Introduction - The field of Industrial Organization developed as an offshoot of traditional Microeconomics. o Differs from traditional Microeconomics, as it analyzes the Firms within an industry, rather than the Industry as a whole (Traditional Micro). Perfectly Competitive Model – Assumes that there is a large # of buyers and sellers, each of which is a “price taker”. Monopoly Model – Assumes that there is only one seller, who has complete control over the price. Oligopoly – A market structure where a relatively small # of firms control the market. Monopolistic Competition – A market with a large # of buyers and sellers, easy entry/exit for firms, and a differentiated offering of products produced. Section 1.1 : Two Approaches to the Study of Industrial Organization Structure - Conduct – Performance (SCP) [Developed by Edward Mason and Joe Bain (1940’s – 1950’s)] The marked is shaped by direct relationships between: market structure , market conduct , and market performance . - Basic market conditions determine the market structure. - Market structure determines the market conduct. - Market conduct determines the market performance. (In addition, government policies have a direct impact on structure, conduct, and performance.) o In Perfectly Competitive markets , an atomistic market structure results in efficient economic performance with price = to marginal cost, inefficient Page 1 of 9
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firms are driven from the market, and long-run economic profits are equal to zero. o In a Monopolistic Market structure, economic performance is poor: Price exceeds marginal cost, inefficient firms can survive in the long-run, and economic profits are greater than zero. Entry Barriers – High expenditures that may make entry into the market more difficult and reduce the # of sellers in the market. (i.e. High costs of “competitive” advertising.) Chicago School (of economics) – [Developed by Economists from the Chicago School (1960’s – 1970’s)] Argued that the price theory models should be the primary tool for analyzing markets. Followers relied heavily upon the price theory models to make predictions about expected conduct and performance and to design empirical tests of their theories. SCP vs. Chicago School - According to SCP economists, increases in market power result in increased profits; Chicago School economists, however, argued that the true relationship might well be that increased efficiency led to increased market power and increased profits . - SCP Industrial Organization economists provided empirical studies suggesting that increased advertising raised entry barriers and resulted in increased profits; Chicago School economists, however, used theory and empirical evidence to suggest that advertising often provided information and that this improved information resulted in lower prices.
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