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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 1: INTRODUCTION
1.
Industrial Organization (IO) or Industrial Economics is astudy of 
imperfect competition
. Perfect competition andperfect monopoly are useful models, but it is like studyingphysics w/o gravity and friction. Also stressed is the notionof 
effective competition
.
2.
Roots trace back to Mason (1939) and Bain (1949), makingit a relatively new field in economics.3.Mainstream models from Adam Smith to Alfred Marshallwere primarily perfect competition & Monopoly.4.First “mainstream” model of imperfect competition wasChamberlain’s model of monopolistic competition (1933)5.IO regarded as a branch of price theory.6.Earliest model was Structure-Conduct-Performance
More empirical than theoretical
Central issue is barriers to entry
Perceived as descriptive, static, and nonanalytical
 
7.
Modern IO based more on theory, particularly game theoryand price theory
Formal oligopoly theory
More theoretical than empirical
Strategic (dynamic) analysis is important
Consider dynamic efficiency
 
 Structure – Conduct – Performance (S-C-P) Paradigm
Market Structure (competitiveness of the market)
Number of firms (CR, HHI)
Barriers to entry
Cost structures (economies of scale)
Demand conditions (elasticity)
Product differentiation, Vertical integration, andDiversificationConduct (behavior)
Price and output decisions
Advertising
R & D
Collusion
Merger and ContractPerformance (success in producing benefits for consumers)
Allocative and production efficiency (static)
Price and profits
Equity
Quality and Technical progress (dynamic)
MarketStructureConductPerformance
Perfect CompetitionMany firms, CR andHHI lowMarginal Cost PricingStatic Efficiency[max (CS + PS)]P = MC = min(AC)MonopolyOne firm, CR=100,HHI=10,000MR=MC (P > MC)Restrict output, P↑InefficientDeadweight Loss
Bad Structure → Bad Conduct → Bad Performance

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