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INDUSTRIAL ECONOMICS

INDUSTRIAL ECONOMICS. INTRODUCTORY REMARKS SEPTEMBER 2005. ORTHODOX MICRO /1. Market allocative mechanism Firms & consumers behaviour for ‘ideal’ operation Normative, top down theory Does not answer policy-related questions (market-abuse limitation, merger policy etc). ORTHODOX MICRO /2.

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INDUSTRIAL ECONOMICS

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  1. INDUSTRIAL ECONOMICS INTRODUCTORY REMARKS SEPTEMBER 2005

  2. ORTHODOX MICRO /1 • Market allocative mechanism • Firms & consumers behaviour for ‘ideal’ operation • Normative, top down theory • Does not answer policy-related questions (market-abuse limitation, merger policy etc)

  3. ORTHODOX MICRO /2 • WELFARE ASPECTS • Model of the firm; pricing and output implications • Perfect competition • Monopoly • Cournot • Monopolistic competition • Managerial models

  4. STRUCTURAL APPROACH • Bain and the Harvard School and the S-C-P paradigm • Structural characteristics of the market determine the behaviour of firms which in turn determines their performance • Similar welfare implications • Particular to general, inductive and empirical approach • The focus is the industry (market) instead of the firm

  5. Chicago School • Demsetz questions the causality in the SCP model of large firms leading to big profits • Well run and efficient firms become both large and earn big profits • Policy implications are completely different to those of the SCP approach; if profits are the reward for efficiency then penalties on the former discourages the latter!

  6. Other approaches /1 • Austrian ; allocation of resources determined by the ‘votes’ of the consumers given their ability to spend • If the entrepreneur guesses correctly what the consumers want he gets a lot of the ‘votes’ (profits) • Hence large profits are the essential ingredient for the market to adjust to the consumers wishes

  7. Other approaches /2 • Schumpeterian: Big firms are essential for innovation and in particular for large technological leaps: they have both the ability and the willingness to spend big money for major projects. • Large market size means market power; but this is needed for the large R&D investments to be undertaken and to be successful.

  8. ORTHODOX THEORY REVISITED • Markets are imperfect because information is imperfect. • Introducing imperfect information and the use of game theory provides a foundation for strategic behaviour (conduct!) by the firms. • Equally in the context of shareholders and managers in managerial models behaviour can be explained using the principal-agent theory. • These theoretical developments are the re-birth of the orthodox theory and constitute the theoretical foundations of the new Industrial Organisation.

  9. So what is conduct? • Pricing decisions • Advertising • R&D spending • Marketing strategies • ALL OF THE ABOVE CAN BE BOTH STRUCTURAL OR STRATEGIC

  10. Feedback mechanisms • Structure determines conduct, but there is also a feedback mechanism: • E.g. successful strategies by a firm eliminate rivals and make the market more concentrated • Government policy and competition legislation in the form of antitrust and regulation seeks to affect both • Conduct of firms may affect government policy (e.g. lobbying)

  11. What is performance? • Profitability • Efficiency • Product quality • Technical progress

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