Industrial Organization Taught by Dr. Prof. Fang Qiyun Textbook: Industrial Organization A Strategic pproach A Written by Jeffrey Church Roger Ware
Industrial Organization Taught by Dr. Prof. Fang Qiyun Textbook: Industrial Organization: A Strategic Approach Written by Jeffrey Church & Roger Ware
Part 1. Foundations · ntroduction The welfare economics of market power Theory of the firm
Part 1. Foundations • Introduction • The welfare economics of market power • Theory of the firm
Ch 1 Introduction 3 questions in IO 1. Why are markets organized or structured as they are? 4 aspects of market structure (1)Firm boundaries. What determines the extent of a firm's activities in production? In particular, what are the factors responsible for determining the extent to which a firm is vertically integrated? (2)Seller concentration seller concentration is a measure of the number and size distribution of firms. Industrial organization attempts to identify the factors that influence or determine seller concentration (3)Product differentiation. Product differentiation exists when product produced by different firms are not viewed as perfect substitutes by consumers. What are the factors responsible for the extent of product differentiation (4) Conditions of entry. The conditions of entry refer to the ease with which new firms can enter a market
Ch.1. Introduction • 3 questions in IO • 1. Why are markets organized or structured as they are? • 4 aspects of market structure • (1)Firm boundaries. What determines the extent of a firm’s activities in production? In particular, what are the factors responsible for determining the extent to which a firm is vertically integrated? • (2)Seller concentration. seller concentration is a measure of the number and size distribution of firms. Industrial organization attempts to identify the factors that influence or determine seller concentration. • (3)Product differentiation. Product differentiation exists when product produced by different firms are not viewed as perfect substitutes by consumers. What are the factors responsible for the extent of product differentiation. • (4)Conditions of entry. The conditions of entry refer to the ease with which new firms can enter a market
3 questions in IO 2. How does the manner in which markets are organized affect the way in which firms behave and market perform? If products produced by different firms are not viewed as perfect substitutes Qly consumers, then there will be a role foe non-price competition. In fact price competition might play a secondary role to other competition, such as product characteristics, advertising, and research and development expenditure A major area of research in industrial organization is concerned with the theory of oligopoly: pricing behavior in a market dominated by a few large firms a different kind of structural issue concerns the various institutions and practices adopted by oligopolistic firms to affect the nature of competition Adam Smith competitive markets were desirable because they led to outcomes that are socially optimal. Under certain circumstances, competition as if guided by an invisible hand results in the socially optimal level of output being produced at minimum resource cost, and distributed it to those who value it the most io is concerned with the efficiency or market performance of markets whose structure is not that are: What will the efficiency properties of imperfectly competition markets be, not just in terms of output but also in terms of product variety, quality, selection, and innovation? Is there a role for government intervention in terms of regulation or competition policy? Can We identify combinations of market structure and firm behavior where market outcomes are socially undesirable and susceptible to improvement? What are the economic foundations for regulation and antitrust policy? Why are intellectual property rights-patents, copyrights, and trademarks -created and enforced by the government?
3 questions in IO • 2. How does the manner in which markets are organized affect the way in which firms behave and market perform? • If products produced by different firms are not viewed as perfect substitutes by consumers, then there will be a role foe non-price competition. In fact price competition might play a secondary role to other competition, such as product characteristics, advertising, and research and development expenditure. • A major area of research in industrial organization is concerned with the theory of oligopoly: pricing behavior in a market dominated by a few large firms. • A different kind of structural issue concerns the various institutions and practices adopted by oligopolistic firms to affect the nature of competition. • Adam Smith: competitive markets were desirable because they led to outcomes that are socially optimal. Under certain circumstances, competition, as if guided by an invisible hand, results in the socially optimal level of output being produced at minimum resource cost, and distributed it to those who value it the most. IO is concerned with the efficiency or market performance of markets whose structure is not that are : What will the efficiency properties of imperfectly competition markets be, not just in terms of output but also in terms of product variety, quality, selection, and innovation? Is there a role for government intervention in terms of regulation or competition policy? Can we identify combinations of market structure and firm behavior where market outcomes are socially undesirable and susceptible to improvement? What are the economic foundations for regulation and antitrust policy? Why are intellectual property rights-patents, copyrights, and trademarks –created and enforced by the government?
3 questions in IO 3. How does the behavior of firms influence the structure or organization of markets and the performance of markets? The emphasis of the previous question was on the effect of market structure on the conduct of firms. The emphasis here is on adopting a more dynamic perspective and recognizing the possibility of feedback effects from firm conduct to market structure. We might expect that strategies which firms adopt today are intended to change market structure and thus firm behavior tomorrow. It would seem in fact that many aspects of non-price competition such as research and development, are specifically designed to alert market structure tomorrow. Clearly, the extent of product differentiation is not determined only by exogenous factors such as the preferences of consumers. Firms have some latitude to choose the characteristics, range variety, and quality of products they sell TWo issues that have received a great deal of attention are The potential strategies firms can adopt to drive competitors out of business in order to establish a monopoly position The strategies that monopolists and oligopolists can adopt to deter the entry of new competitors. These kinds of strategies obviously make seller concentration and barriers to entry endogenous
3 questions in IO • 3. How does the behavior of firms influence the structure or organization of markets and the performance of markets? • The emphasis of the previous question was on the effect of market structure on the conduct of firms. The emphasis here is on adopting a more dynamic perspective and recognizing the possibility of feedback effects from firm conduct to market structure. We might expect that strategies which firms adopt today are intended to change market structure and thus firm behavior tomorrow. It would seem in fact that many aspects of non-price competition, such as research and development, are specifically designed to alert market structure tomorrow. Clearly, the extent of product differentiation is not determined only by exogenous factors such as the preferences of consumers. Firms have some latitude to choose the characteristics, range, variety, and quality of products they sell. • Two issues that have received a great deal of attention are: • The potential strategies firms can adopt to drive competitors out of business in order to establish a monopoly position. • The strategies that monopolists and oligopolists can adopt to deter the entry of new competitors. These kinds of strategies obviously make seller concentration and barriers to entry endogenous