Summary Industrial Organization
Industrial Organization: Content overview:
Part 1: Theoretical foundations:
• Chapter 1: Industrial Organization: an introduction: Chapter 1-An introduction-
A perfectly competitive industry has 6 main characteristics: 1) large number of buyers and sellers 2) producers and consumers have perfect knowledge 3) the products sold by firms are identical 4) firms act independently and aim at maximizing profits 5) no entry or exit barriers 6) firms can sell as much output as they want at the current market price NEOCALSSICAL THEORY: Static conception, focus on long-run According to Schumpeter and the Austrian School, the fact that a firm earns an abnormal profit (monopoly) profit does not constitute evidence that the firm is guilty of abusing its market(monopoly) power at the expense of consumer: entrepreneur, creative destruction monopoly status is only a temporary phenomenon competition is a dynamic process Disequilibrium reflects imperfect information or ignorance on the part of buyers and sellers!! Structure-Conduct-Performance (SCP) Paradigm Structure is the central element. It influences conduct which in turn has an effect on the performance STRUCTURE Number and size of firms, entry conditions, product differentiation, vertical integration, diversification; fixed int he short-run CONDUCT Business objectives, pricing, design and branding, advertising and marketing, R&D, collusion, merger; refers to the behaviour of a firm PERFORMANCE Profitability, growth, quality of products and services, technological service, productive and allocative efficiency; Chicago School about abnormal profit: causes may be cost advantage and superior efficiency
STUDY CASE: EUROPEAN BANKING To prevent from damaging implications for consumer welfare, there can be interventions of the government. The government policy is regulatory intervention to promote competition and prevent abuses of market power preventing a horizontal merger, break up of a large incumbent producer price
Part 1: Theoretical foundations:
• Chapter 1: Industrial Organization: an introduction: Chapter 1-An introduction-
A perfectly competitive industry has 6 main characteristics: 1) large number of buyers and sellers 2) producers and consumers have perfect knowledge 3) the products sold by firms are identical 4) firms act independently and aim at maximizing profits 5) no entry or exit barriers 6) firms can sell as much output as they want at the current market price NEOCALSSICAL THEORY: Static conception, focus on long-run According to Schumpeter and the Austrian School, the fact that a firm earns an abnormal profit (monopoly) profit does not constitute evidence that the firm is guilty of abusing its market(monopoly) power at the expense of consumer: entrepreneur, creative destruction monopoly status is only a temporary phenomenon competition is a dynamic process Disequilibrium reflects imperfect information or ignorance on the part of buyers and sellers!! Structure-Conduct-Performance (SCP) Paradigm Structure is the central element. It influences conduct which in turn has an effect on the performance STRUCTURE Number and size of firms, entry conditions, product differentiation, vertical integration, diversification; fixed int he short-run CONDUCT Business objectives, pricing, design and branding, advertising and marketing, R&D, collusion, merger; refers to the behaviour of a firm PERFORMANCE Profitability, growth, quality of products and services, technological service, productive and allocative efficiency; Chicago School about abnormal profit: causes may be cost advantage and superior efficiency
STUDY CASE: EUROPEAN BANKING To prevent from damaging implications for consumer welfare, there can be interventions of the government. The government policy is regulatory intervention to promote competition and prevent abuses of market power preventing a horizontal merger, break up of a large incumbent producer price