Managerial economics

The nature
of industry
Gunadi Setyawan - 22/499301/NEK/26715
Heru Purbo Wiyoto - 22/499152/NEK/26666
Karima Sabrina Amalia Deska - 22/499098/NEK/26643
Learning Objectives

LO1 Calculate alternative measures of industry structure, conduct, and performance, and discuss their
limitations.

LO2 Describe examples of vertical, horizontal, and conglomerate mergers, and explain the economic
basis for each type of merger.

LO3 Explain the relevance of the Herfindahl-Hirschman index for antitrust policy under the horizontal
merger guidelines.

Describe the structure–conduct–performance paradigm, the feedback cri- tique, and their relation
LO4
to the five forces framework.

LO5 Identify whether an industry is best described as perfectly competitive, a monopoly,

monopolistically competitive, or an oligopoly.
 01 Market Structure

02 Conduct

Table of Performance
03
contents
THE STRUCTURE-CONDUCT-
04 PERFORMANCE PARADIGM

OVERVIEW OF THE REMAINDER

05 OF THE BOOK
 01
MARKET
STRUCTURE
Measures of Industry
Concentration
 Market Structure
Refers to factors :

Firm Size Technology Demand Conditions Potential for Entry

Industry Concentration
 Industry Concentration
Industry Concentration determines whether the optimal decisions of a manager who faces little competition from other
firms in the industry will differ from those of a manager who works in an industry in which there are many firms.

Measures of Industry Concentration

Four-Firm Concentration Ratio The Herfindahl- Hirschman Index (HHI)

● Rasio konsentrasi mengukur berapa banyak total
output dalam suatu industri yang dihasilkan oleh
perusahaan terbesar di industri itu, biasanya
menggunakan total penjualan empat perusahaan
(C4). terbesar dalam industri tersebut.
● C4 Ratio adalah total market share dari empat
perusahaan terbesar dalam sebuah industri.
● Indeks Herfindahl adalah pangkat dua pangsa
pasar dari seluruh perusahaan yang ada dalam
industri.
● Digunakan oleh analis industri untuk menentukan
struktur pasar dan persaingan. Sedangkan bagi
regulator dapat digunakan untuk mengukur
konsentrasi pasar dan mengevaluasi merger
(apakah ketika terdapat 2 perusahaan merger akan
menghasilkan kekuatan monopoli atau tidak)
 Industry Concentration :
Study Case

Question :
Suppose an industry consists of three firms. Two firms have
sales of $10 each, and one firm has sales of $30. What is the
Herfindahl-Hirschman index for this industry? What is the
four-firm concentration ratio?

Answer :
Since total industry sales are ST = $50, the largest firm has a
< 1,500 (Pasar yang
market share of w1 = 30/50 and the other two firms have a kompetitif)
market share of 10/50 each. Thus, the Herfindahl-Hirschman
index for this industry is

1,500 – 2,500 (Pasar

yang terkonsentrasi
sedang)

The four-firm concentration ratio : (10+10+30)/50 = 1

Since the top three firms account for all industry sales.
 Limitation of Concentration
Measures
● Global Market
Foreign producers excluded to the data.

● National, Regional, and Local Markets.

In many industries, the relevant markets are local and may be composed of only a few firms.
When the relevant markets are local, the use of national data tends to understate the actual
level of concentration in the local markets.

● Industry definition and product classes.

As a general rule, products that are close substitutes (have large, positive cross-price
elasticities) are considered to belong to a given industry class.
 Technology
Industries differ regarding the technology used to produce goods and services. Some industries are labor
intensive, some industries are capital intensive, ther industries use a combination of labor and capital.

Industri Padat Modal

● Modal besar dan teknologi tinggi
● Contoh: industri hulu seperti mesin, logam
dasar dan industri elektronik
● Tujuannya untuk mencapai tingkat produksi
optimum dengan biaya rendah dan harga
jual murah
Industri Padat Karya
● Tenaga manusia > tenaga mesin
● Contoh: industri tekstil, industry makanan dan
minuman
● Tujuannya untuk membuka banyak lapangan kerja
 Demand and Market Conditions
Industri dengan permintaan yang Industri dengan permintaan yang
rendah, dapat diartikan hanya tinggi, dapat diartikan terdapat banyak
terdapat sedikit perusahaan. perusahaan.

Advertising Company, Industri Makanan dan

Digital Marketing Minuman
 Rothschild index
Salah satu cara mengukur elasticity Industry Demand dimana harga produk secara keseluruhan relative
terhadap sensitivitas kuantitas yang diminta dari satu perusahaan terhadap perubahan harganya.

Rothschild Index :

ET : the elasticity of demand for the total market

EF : the elasticity of demand for the product of an individual firm

R = 0, Persaingan Sempurna
R = 1, Monopoli

Ketika suatu industri terdiri dari banyak

perusahaan dan masing-masing memproduksi
produk serupa maka Rothschild index akan
mendekati nol (persaingan sempurna)
 Market Entry
and Exit Conditions
Barriers to entry
● Capital requirements.
● Patents and copyrights.
● Economies of scale.
● Economies of scope.
 02
Conduct

Pricing Behavior
Integration and Merger Activity
 Pricing Behavior
The lerner index :
P = Price
MC = Marginal
Cost
● The Lerner index provides a measure of how
much firms in an industry mark up their prices
over marginal cost. The higher the Lerner
index, the greater the firm’s markup.
● The index ranges from 0 to 1.
-When P = MC, the Lerner Index is zero; the
firm has no market power.
-A Lerner Index closer to 1 indicates relatively
weak price competition; the firm has market
power.
The Markup factor :
1/(1 − L) = The Markup Factor
● The Markup Factor defines the factor by which
marginal cost is multiplied to obtain the price
of the good.
● When the Lerner Index is zero (L = 0), the
markup factor is 1 and P = MC.
● When the Lerner Index is 0.20 (L = 0.20), the
markup factor is 1.25 and the firm charges a
price that is 1.25 times marginal cost.
 Integration and Merger Activity
Integration Merger
● Dua atau lebih perusahaan yang
● Menyatukan sumber daya
ada “bersatu” atau bergabung
produktif perusahaan
menjadi satu perusahaan
● Dapat terjadi selama
pembentukan perusahaan

Alasan Terjadinya Merger

● Mengurangi biaya transaksi
● Menuai manfaat dari skala dan
cakupan ekonomi
● Meningkatkan kekuatan pasar
● Mendapatkan akses yang lebih
baik ke pasar modal
 Integration and Merger Activity
Type of
● Vertical Integration
Where various stages in the production of a single product are carried
out by one firm.
Forward Integration: Salim Group mendirikan pabrik tepung Bogasari, Kelompok Kompas Gramedia memiliki
anak perusahaan termasuk penerbitan, PT Gudang Garam memiliki pabrik kertas rokok di kediri yaitu PT
Surya Zig Zag

● Horizontal Integration
The merging of the production of similar products into a single firm.
Apple menjual komputer, iPhone, dan iPad, serta merancang perangkat lunak yang mendukung produknya.

● Conglomerate Mergers
The integration of different product lines into a single firm.
Perusahaan Bakrie yang bergerak dalam bidang telekomunikasi dengan merek dagang esia, kemudian dalam
pertambangan (KTM), kuliner (Holland Bakrie) dan pertelevisian (TV ONe)
 Research and Development Advertising

The optimal amount to spend on R&D will

Advertising intensities vary across firms
depend on the characteristics of the
in different industries.
industry in which the firm operates.
 03
Performance

Profit
Social Welfare
 The Performance of an
industry

Industry performance is measured by industry

profitability and social Welfare
 PROFIT

● As the result of placing Price above the Cost

● Big Companies are not necessarily more profitable

● High profit Industries are not necessarily high social welfare

● Profit is one of primary indicator to assess outcome of a company

 TOp 10 List Company

Source: Fortune global 500 : ,Fortune 500 list of companies 2022 | Fortune
 SOCIAL WELFARE
It is the amount of consumer and producer surplus generated in a market.
We will use Dansby-Willig (DW) performance Index as indicator.

● If the DW index for an industry is zero, social welfare will not improve
by encourage industry to expand their output.

● When the index is greater than zero, social welfare would improve if
industry output were expanded.
 Dansby-willig index

Indeks Dansby-Willig Indeks Dansby-Willig

adalah indeks yang mengukur peningkatan
memperhitungkan kesejahteraan sosial
perubahan kesejahteraan ketika output ekonomi
sosial ekonomi. meningkat.
Dansby willig index

Book for education

Cosmetic

Premium Bag,
Shoes, etc
 04
THE STRUCTURE-CONDUCT-
PERFORMANCE PARADIGM

The causal view

The Feedback Critique
 The Structure-Conduct-Performance (SCP)
Causal View

Structure Conduct Performance

● Conduct can affect market structure

● Market performance can affect conduct as well as market structure
Tyres Industries Market Ranking Market share

Four Firm Concentration Ratio = 33%+22%+15%+6%

= 76 %
It is means :
● Truly concentrated market
● Less competition
● Producer surplus
● Higher price
● Low Social WelFare

Struktur pasar yang terkonsentrasi (Market structure),

menyebabkan harga yang tinggi (Conduct), dan kemudian
menyebabkan profit yang tinggi untuk producer namun
social welfare yang rendah (Performance)
 05
OVERVIEW OF THE
REMAINDER OF THE BOOK

Looking Ahead
(Various Market Structures)
 LO 5 : Looking Ahead (Various Market Structures)

Perfect Competition
Perfect Competition Monopoly

● Banyak, perusahaan kecil dan konsumen relatif terhadap pasar; ● Produsen tunggal barang atau jasa;
● Perusahaan menghasilkan produk yang sangat mirip; ● Memiliki kekuatan pasar (P>MC);
● Tidak ada kekuatan pasar (P=MC)

Monopolistic Competition Oligopoly

● Beberapa perusahaan besar cenderung mendominasi pasar;

● Banyak, perusahaan kecil dan konsumen relatif terhadap pasar;
● Perusahaan menghasilkan produk yang sedikit berbeda; ● Strategi harga/pemasaran saling bergantung satu sama
● Kekuatan pasar terbatas; lainnya dengan perusahaan lain di dalam industri;

Source: Managerial Economics and Business Strategy, 10th Edition page 223
LO 5 : Looking Ahead (Various Market Structures)

Source: Business Essentials, 12th Edition page 45

● Novita :Siapa yang mengukur Rothschild index? Bagimana tau oligopoli?
● Atas : Monopoli, dikuasai oleh regulasi negara. Apakah ada monopoli
yang dikuasai non government?
● Aprian : apakah berbeda2 apabila ada new entry yang masuk dalam
company kita? Respon pasarnya?
● Sony : Social Welfare, apabila ada perusahaan yang tidak terlalu
berdampak tapi rajin di sosial apakah masih masuk ke social welfare?
● Grace : monopoli PLN satu-satunya yang menjual listrik, kenapa masih
mengalami kerugian?
● Christo : integration, pengaruhnya integrasi dan merger ke social
welfare? Mana yang paling berpengaruh?
● Gani : semakin sedikit kompetisi semakin mahal, tapi kenapa menyajikan
persaingan harga yg murah?
Thanks
MM UGM
SEMBA 45A

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