⛪

Unit 3- The organisation of the

firm and industry
SPOT MARKET: Informal relationship between buyer and seller where none is
obligated to make an exchange

CONTRACT: Formal relationship between buyer and seller that obligates an

exchange in a legal document

PROCEDURE INPUTS INTERNALLY (VERTICAL INTEGRATION) : A firm

produces the inputs needed to the final product.

TRANSACTION COSTS: costs associated with acquiring an input a part from the
money paid to the supplier. (implicit)

a. Specialised investment

a. to allow thw two parties to exhcnge

b. Relationship specific exchange

a. when parties of a transaction have made a specialised investment

VERTICAL INTEGRATION
Use Advantages Disadvantages

skips middleman
when inputs require significant internal regulatory
reduced oportunism
transaction costs, complex mechanism cost of setting
mitigates transaction
contracting, specialised investment. up no longer specialised
costs

COMPENSATION AND THE PRINCIPAL-AGENT

PROBLEM
The principal problem for the lack of effort from labout inputs is the SEPARATION
OF OWNERSHIP AND CONTROL.

owners must incent managers

Unit 3- The organisation of the firm and industry 1

 employees and managers

Managers face an economic trade off of leisure against labour.

INCENTIVES

1. Fixed salary

a. wages

2. Incentive contracts

a. performance related pay

b. absolute and relative

In order to align onwers and managers intrests: stock option.

In order to align manager workder interests: profit sharing, revenue sharing, price
rates, tima clocks.

EXTERNAL INCENTIVES

Reputation or take over threat can incentive managers .

MARKET STRUCTURE
factors:

number of firms

concentration (size)

technological and costs consitions

demand

Unit 3- The organisation of the firm and industry 2

 barriers of entry

conduct

MEASURING INDUSTRY CONCENTRATION

C4 doesn´t take into account size and distribution, HHI gives more weigt to larger
businesses.

We muiltiply by 10000 beacuase the numbers are too small.

Legislation HHI values

Low concentration <1000

Moderate concentration between 1000 and 1800

Concentrated >1800

If the HHI in an indutry is larger than 1800 then the authorities will not allow for a
merger.

TECHNOLOGY AND COSTS

It depends of labour or capital intensive industries.
If the available technology is different, somw firms will have a cost advantage.

Unit 3- The organisation of the firm and industry 3

 DEMAND AND MARKET CONDITIONS
Low demand may imply few firms

High demand may imply many firms

Elasticity varies:

ROTHSCHILD INDEX

POTENTIAL FOR ENTRY

factors:

capital requirements

patents

economies of scale …

CONDUCT
price markup over costs

integration or mergers

adventising expenditures

RD expenditures

1. PRICING BEHAVIOUR:

Unit 3- The organisation of the firm and industry 4

 2. INTEGRATION AND MERGER ACTIVITIES

a. merger

i. reduce transaction costs

ii. economies of scale

iii. increase market power

iv. better access to capital markets

b. vertical integration

i. adding stages of the production function

c. horizontal integration

i. merging similar products into a firm

d. conglomerate mergers

i. two or more differnt product lines into a firm

The DANSBY-WILLIG PERFORMANCE INDEX measures how much social

welfare would increase if the output of an indusrty would increase by a small
amount

STRCUTURE- CONDUCT- PERFORMANCE

Structure Conduct Performance

Unit 3- The organisation of the firm and industry 5

 Structure Conduct Performance

number of firms, profit and social

individual bahaviour: price, supply,
concentration, cost welfare,
RD, innovation, vertical integration
structure… employment
Dansby-Willig
Concentration ratio Lerner index
performance index

The SCP paradigm interprets that these three aspects are interrelated.

Unit 3- The organisation of the firm and industry 6