The demand for o 2 characteristics of markets in manufactured goods (1defferentiated products (2)a few relatively large suppliers Firms face downward sloping demand curves Small numbers of competitors or the preference of consumers for a specific products bestows some degree of market power on firms, and the competition will be imperfect Market power is the ability to profitably raise price above marginal cost lo is the study of the creation exercise maintenance and effects of market power
The demand for IO • 2 characteristics of markets in manufactured goods • (1)defferentiated products • (2)a few relatively large suppliers • Firms face downward sloping demand curves • Small numbers of competitors or the preference of consumers for a specific products bestows some degree of market power on firms, and the competition will be imperfect. • Market power is the ability to profitably raise price above marginal cost. • IO is the study of the creation, exercise, maintenance, and effects of market power
Methodologies ( The methodology of a discipline refers to the basic approach(es)commonly used in a discipline in the creation of knowledge. It is a guide for practitioners about how to go about answering a question or solving a problem The traditional approach in IO is the S-C-P(structure-conduct performance) paradigm. The orientation of SCP approach is primarily empirical: researchers in this tradition try to uncover empirical regularities across industries The"new lo has been more concerned with develo ping and testing explanations of firm conduct Key distinguishing features of the new lO (emphasis on specific industry (2)focus on developing models of firm behavior (empirical work is based on well-founded models of firm behavior
Methodologies (1) • The methodology of a discipline refers to the basic approach(es) commonly used in a discipline in the creation of knowledge. It is a guide for practitioners about how to go about answering a question or solving a problem. • The traditional approach in IO is the S-C-P (structure-conductperformance) paradigm. The orientation of SCP approach is primarily empirical: researchers in this tradition try to uncover empirical regularities across industries. • The “new IO” has been more concerned with developing and testing explanations of firm conduct. • Key distinguishing features of the new IO: • (1)emphasis on specific industry • (2)focus on developing models of firm behavior • (3)empirical work is based on well-founded models of firm behavior
Methodologies(2 The ability to develop good theoretical explanations of firm behavior is due to the developments in non cooperative game theory in the 1970s Non-cooperative game theory consists of tools that are used to model the behavior or choices of agents(individuals, firms, etc. when the payoff (profit) of a choice depends on the choices of others The focus of the new lo on the conduct of firms in imperfectly competitive markets involves determining the factors and strategies that provide firms with a competitive advantage. With its focus on the nature and form of rivalry in concentrated markets, much of lo is a theory of business strategy
Methodologies (2) • The ability to develop good theoretical explanations of firm behavior is due to the developments in noncooperative game theory in the 1970s. Non-cooperative game theory consists of tools that are used to model the behavior or choices of agents (individuals, firms, etc.) when the payoff (profit) of a choice depends on the choices of others. • The focus of the new IO on the conduct of firms in imperfectly competitive markets involves determining the factors and strategies that provide firms with a competitive advantage. With its focus on the nature and form of rivalry in concentrated markets, much of IO is a theory of business strategy
Methodologies(3 lo distinguishes between strategic and tactical decisions Strategic decisions have long-run implications for market structure-the competitive environment faced by firms Strategic decisions involve things like product characteristics and capacity. Tactical decisions determine the short-term actions firms take given the current environment. The tactical decisions of a firm are usually either its price or output. Strategic decisions matter because by determining the current environment of a firm, they affect its pricing or output decisions. The ability of strategic variables to affect tactical decisions arises because of commitment. Strategic decisions commit the firm to follow a pricing policy or production level-because they are in its best interests-and that commitment depends on the irreversibility of the strategic decisions
Methodologies (3) • IO distinguishes between strategic and tactical decisions. Strategic decisions have long-run implications for market structure-the competitive environment faced by firms. Strategic decisions involve things like product characteristics and capacity. Tactical decisions determine the short-term actions firms take given the current environment. The tactical decisions of a firm are usually either its price or output. Strategic decisions matter because by determining the current environment of a firm, they affect its pricing or output decisions. The ability of strategic variables to affect tactical decisions arises because of commitment. Strategic decisions commit the firm to follow a pricing policy or production level-because they are in its best interests-and that commitment depends on the irreversibility of the strategic decisions
Methodologies (4) Students of io and strategic management are concerned with identifying strategies which create monopoly rents and allow firms to maintain them of particular interest is the ability of firms to engage in profitable entry deterrence. An entry barrier is a structural characteristic of a market that protects the market power of incumbents by making entry unprofitable. Profitable entry deterrence-preservation of market power and monopoly profits-by incumbents typically depends on these structural characteristics and the behavior of incumbents post-entry. Appropriate strategic choices can commit an incumbent firm to act aggressively post-entry and insure profitable entry deterrence. In essence, firms can make investments that create barriers to entry or magnify raise the importance of existing barriers to entry
Methodologies (4) • Students of IO and strategic management are concerned with identifying strategies which create monopoly rents and allow firms to maintain them. Of particular interest is the ability of firms to engage in profitable entry deterrence. An entry barrier is a structural characteristic of a market that protects the market power of incumbents by making entry unprofitable. Profitable entry deterrence-preservation of market power and monopoly profits-by incumbents typically depends on these structural characteristics and the behavior of incumbents post-entry. Appropriate strategic choices can commit an incumbent firm to act aggressively post-entry and insure profitable entry deterrence. In essence, firms can make investments that create barriers to entry or magnify/raise the importance of existing barriers to entry