Managerial Economics &e Business strategy Chapter 7 The Nature of Industry Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 7 The Nature of Industry
Overview Ⅰ. Market structure a Measures of Industry concentration IL Conduct Pricing behavior a Integration and Merger Activity II. Performance ■ Dansby- Willig Index a Structure-Conduct-Performance Paradigm IV Preview of Coming Attractions Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Market Structure n Measures of Industry Concentration II. Conduct n Pricing Behavior n Integration and Merger Activity III. Performance n Dansby-Willig Index n Structure-Conduct-Performance Paradigm IV. Preview of Coming Attractions
Industry analysis Market structure Number of firms size. etc Conduct Pricing, advertising, r&D, etc Performance Profitability, consumer surplus, social welfare Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Industry Analysis • Market Structure n Number of firms, size, etc. • Conduct n Pricing, advertising, R&D, etc. • Performance n Profitability, consumer surplus, social welfare
The Structure-Conduct Performance paradigm The CausalⅤiew Market Conduct Performance Structure The Feedback Critique No one-way causal link Conduct can affect market structure Market performance can affect conduct as well as market structure Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Structure-ConductPerformance Paradigm • The Causal View Market Structure Conduct Performance • The Feedback Critique n No one-way causal link. n Conduct can affect market structure. n Market performance can affect conduct as well as market structure
Industry Concentration Four-Firm Concentration ratio The sum of the market shares of the top four firms in the defined industry: CA=W1+ W2+W3+ W4 Herfindahl-Hirshmann Index(hhD a The sum of the squared market shares of firms in a given industry, multiplied by10.000:HH=1000×Σw2 Limitations a Market Definition: National, regional, or local? Global Market: Foreign producers excluded Industry definition and product classes Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Industry Concentration • Four-Firm Concentration Ratio n The sum of the market shares of the top four firms in the defined industry: C4 = w1 + w2 + w3 + w4 • Herfindahl-Hirshmann Index (HHI) n The sum of the squared market shares of firms in a given industry, multiplied by 10,000: HHI = 10,000 S wi2 • Limitations n Market Definition: National, regional, or local? n Global Market: Foreign producers excluded n Industry definition and product classes