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IDE 8

IDE 8

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Published by Arina Farihan Azhar

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Published by: Arina Farihan Azhar on Dec 08, 2011
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12/08/2011

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CHAPTER 8: Industry Structure & Performance
1.
This chapter considers the not-so-easy transition from theory toempirical verification.2.Two difficulties with this are:(i)Old time S-C-P was weak on theory(ii)Modern IO strong on theory –difficult to verify
3.
Economists seek answers to two questions.(i)How much market power to particular firms orindustries exercise?(ii)What are the major factors that determine marketpower? (Through structure or efficiency/innovation)Empirical HistoryIndustry narrative case studiesTraditional S-C-P that aggregate data across industriesModern ‘new empirical IO’ focusing again on specific industries
 
Modified Table 8.1: Predictions based on Market StructureP MC Π
SR 
Π
LR 
Competition0+ or -0Monop. Comp.++ or -0Monopoly++ or -+ or 0Oligopoly++ or -+ or 0Predictions based on Creating Value from Competitive AdvantageDifferentiation++ or -+ or 0Cost Leadership+ or 0+ or -+ or 0
1.
The SCP approach is based on the generalization that price-costmargins and profits vary with the number of rivals and the sizeof entry barriers.2.Long-run positive profit under differentiation or cost leadershipis sustainable only if there is continuous improvement throughinnovation.
 
In order to investigate the relationship between structure andperformance, measures or metrics of structure and performance arerequired.Measures of performance most often consider measures of marketpower examining price, cost, and profit and may include:
Rate of return
Price-cost margin
Tobin’s q
[(market value of firm)/(replacement cost of assets)]
I.Rate-of-ReturnLong-run (economic) profits will be positive under the “bad”structures of monopoly and oligopoly. Profits will also be positive forfirms achieving a competitive advantage.Need to adjust accounting profit and then compare to somebenchmark to determine level of profit.

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