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Презентация на тему Industrial Economics A: Structure, Conduct and Performance ( lecture 1 )

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Module logisticsSee the module outline for details.Some highlights:Textbooks: Lipczynski, Wilson and GoddardChurchAssessment: 1.5 hour exam (70%), and an individual coursework (30%)The seminar will take place during teaching weeks 9 and 10 (depending on your group).
Industrial Economics A:  Structure, Conduct and Performance  Lecture 1 Module logisticsSee the module outline for details.Some highlights:Textbooks: Lipczynski, Wilson and GoddardChurchAssessment: Module structure			   Structure     ? Conduct IO is the application of microeconomic theory to the analysis of firms, IO increases our understanding of problems faced by firms:Externally, how firms compete For policy makers:Competition policy aims to prevent firms from abusing market power. 2010: The EU commission accuses Google of promoting its shopping service in Google could face a 3bn euros fine.Related to that case, IO provides Typology of market structures Dynamic theory where markets are changing due to the activities of entrepreneurial Creative destruction:  The music industry1850190019502000Wind-up gramophoneBarrel organPianolaHi-Fi stereoLP recordsTape cassetteMP3Compact DiscsElectrical gramophone The Chicago SchoolThe Chicago School (1970-80s): Also argues against government interventionLarge firms Concentrates on empirical analysis rather than on theoretical analysis.Bain (1956): There is Structure	 ? Conduct  ? PerformanceThe SCP paradigmThe number and size distribution According to SCP, relationships between structural variables and market performance hold across SCP & European banking: Structure1980s: European banking was fragmented. Banks did not SCP & European banking: Structure1990-2009: decline in the number of banks SCP & European banking: Structure1990-2009: increased level of seller concentration SCP & European banking: ConductFollowing the deregulation, many banks have consolidated (M&A), SCP & European banking: Performance1990-2006: increased profitability despite the lowering of entry Structure	 ? Conduct  ? PerformanceConduct to structure? R&D, advertising, Structure	 ? Conduct  ? PerformancePublic policies that aim to Profits in America and the  practical relevance of IOSource: ‘Too much Profits in America Profits in America - Historical developmentsIn the 1990s American firms faced a Profits in America Profits in America Profits in AmericaAbout 25% of America’s abnormal profits are spread across a Production and costs Production and costs  Short run production Short run costs Long run costsIn the long-run, firms can change their usage of all Long run costs Application to oil pipelinesCosts associated with construction and operation:Planning and designAcquisition of Application to oil pipelinesElectricity costs vary with throughput, but the number of Economies of scaleEconomies of scale impact the LRACMinimum efficient scale = output Economies of scale Empirical studies of economies of scaleSome firms have U-shaped LRACHowever, manufacturing firms Empirical studies of economies of scaleSurvivorship studies: If a particular plant size Economies of scopeEconomies of scope are the cost savings that arise when Economies of scopeExample 3: Umbrella advertisingAdvertising one Samsung product will lead to Demand elasticity  Demand elasticity  Demand elasticity Demand elasticity Cross-price elasticity of demandCES>0. Goods 1 and 2 are substitute. As the IO views industries as dynamic entitiesPractical relevance of IO (competition policy; high
Слайды презентации

Слайд 2 Module logistics
See the module outline for details.
Some highlights:
Textbooks:

Module logisticsSee the module outline for details.Some highlights:Textbooks: Lipczynski, Wilson and


Lipczynski, Wilson and Goddard
Church
Assessment: 1.5 hour exam (70%), and

an individual coursework (30%)
The seminar will take place during teaching weeks 9 and 10 (depending on your group).

Слайд 3 Module structure

Structure

Module structure			  Structure   ? Conduct ? PerformanceMarket definitionConcentration

? Conduct ? Performance

Market definition
Concentration measures
Concentration determinants
Testing

SCP, NEIO

Advertising

R&D

Market power & welfare






Product Differentiation


Слайд 4 IO is the application of microeconomic theory to

IO is the application of microeconomic theory to the analysis of

the analysis of firms, markets and industries
In IO

(unlike microeconomics), the industry structure is entirely modelled and is dynamic.
Number and size distribution of firms
Barriers to entry
Product differentiation
Vertical integration and diversification

What is industrial organization?


Слайд 5 IO increases our understanding of problems faced by

IO increases our understanding of problems faced by firms:Externally, how firms

firms:
Externally, how firms compete in the marketplace (Theory of

markets)
Firm as a black box and focus on how firms compete with each other.
Internally, organizing production within the firm (Theory of the firm)
Look inside the firm and explain things firm size, the boundaries of the firm, and incentives within the firm.

What is industrial organization?










Слайд 6 For policy makers:
Competition policy aims to prevent firms

For policy makers:Competition policy aims to prevent firms from abusing market

from abusing market power. [Sherman Act 1890, China antitrust

law 2007]
How to measure market power and excess profit?
How competitive is a specific industry?
What types of firm behavior can make an industry less competitive?
What type of market structure is most conductive of innovation?

IO and policymaking


Слайд 7 2010: The EU commission accuses Google of promoting

2010: The EU commission accuses Google of promoting its shopping service

its shopping service in internet search at the expense

of rival services
Google is accused of systematically favouring its own comparison shopping product in its general search results pages
http://europa.eu/rapid/press-release_IP-15-4780_en.htm
Google’s response:
“Economic data (…), and statements from complainants all confirm that product search is robustly competitive”.
Google claims that Google shopping is operating in a field that includes Amazon and eBay, where shoppers go to compare prices.

IO and policymaking: The Google antitrust case


Слайд 8 Google could face a 3bn euros fine.
Related to

Google could face a 3bn euros fine.Related to that case, IO

that case, IO provides answers to the following questions.
How

to define a market?
How to measure market power?
How to stop dominant firms from abusing market power?

IO and policymaking: The Google antitrust case


Слайд 9 Typology of market structures

Typology of market structures

Слайд 10 Dynamic theory where markets are changing due to

Dynamic theory where markets are changing due to the activities of

the activities of entrepreneurial and profit-seeking innovators.
“Creative destruction” (Schumpeter,

1928): Competition is driven by innovation
Innovation destroys old products and processes and replaces them with new ones.
Innovators earn profits and imitation gradually erodes these profits by cutting prices and raising input costs.
Abnormal profits and market power are necessary to motivate firms to innovate, and improve products in the long run

Austrian School: Schumpeter


Слайд 11 Creative destruction: The music industry
1850
1900
1950
2000
Wind-up gramophone
Barrel organ
Pianola
Hi-Fi stereo
LP

Creative destruction: The music industry1850190019502000Wind-up gramophoneBarrel organPianolaHi-Fi stereoLP recordsTape cassetteMP3Compact DiscsElectrical gramophone

records
Tape cassette
MP3
Compact Discs
Electrical gramophone


Слайд 12 The Chicago School
The Chicago School (1970-80s): Also argues

The Chicago SchoolThe Chicago School (1970-80s): Also argues against government interventionLarge

against government intervention
Large firms are large because they are

more efficient
In the long run abuse of market power is unlikely, e.g. collusive agreements are unstable
Markets have a tendency to revert towards competition, without the need for government intervention

Слайд 13 Concentrates on empirical analysis rather than on theoretical

Concentrates on empirical analysis rather than on theoretical analysis.Bain (1956): There

analysis.
Bain (1956): There is a causal relationship between concentration

and profitability:

The SCP paradigm


Слайд 14
Structure ? Conduct ? Performance
The SCP paradigm

The

Structure	 ? Conduct ? PerformanceThe SCP paradigmThe number and size distribution

number and size distribution of firms
Entry conditions
Vertical integration and

diversification

Pricing strategies
Advertising
R&D
Differentiation
Collusion
Mergers


Profitability
Growth
Quality of products
Technical progress
Productive efficiency

SCP assumes a causal relationship between structure, conduct, and performance.
Most influential during the 1950-1970s.


Слайд 15 According to SCP, relationships between structural variables and

According to SCP, relationships between structural variables and market performance hold

market performance hold across industries.

The line of causality

is from structure through performance. If a stable relationship is established between structure and market power, it is assumed that structure determines market power.

The SCP paradigm


Слайд 16 SCP & European banking: Structure
1980s: European banking was

SCP & European banking: Structure1980s: European banking was fragmented. Banks did

fragmented. Banks did not operate in other countries [high

entry barriers]. Domestic banks did not face competition from foreign banks.
Deregulation made EU banking more competitive
Second Banking Directive, 1990
Creation of the euro
As a consequence: Banks able to trade throughout Europe.
Lowered entry barriers.

Do this make the industry more competitive or less competitive?

Слайд 17 SCP & European banking: Structure
1990-2009: decline in the

SCP & European banking: Structure1990-2009: decline in the number of banks

number of banks


Слайд 18 SCP & European banking: Structure
1990-2009: increased level of

SCP & European banking: Structure1990-2009: increased level of seller concentration

seller concentration











Слайд 19 SCP & European banking: Conduct
Following the deregulation, many

SCP & European banking: ConductFollowing the deregulation, many banks have consolidated

banks have consolidated (M&A), e.g.
Unicredito (Italy) and HVB (Germany)
BNP

Paribas (France) Banco Nazionale de Lavoro (Italy)
Banco Santander (Spain) and Alliance of Leicester (UK)
Large banks have adapted their structures, risk management and strategic planning functions to deal with pan-European activity.

Слайд 20 SCP & European banking: Performance
1990-2006: increased profitability despite

SCP & European banking: Performance1990-2006: increased profitability despite the lowering of

the lowering of entry barriers.
How to explain the increased

profits?
Increased consolidation; Product diversification; Cost-cutting

Слайд 21

Structure ? Conduct ? Performance




Conduct

Structure	 ? Conduct ? PerformanceConduct to structure? R&D, advertising, differentiationPerformance

to structure? R&D, advertising, differentiation
Performance to structure? Growth and

changing market shares
Performance to conduct? Profitability and capacity to invest in R&D, or cut prices


SCP: Reverse causality?





Слайд 22

Structure ? Conduct ? Performance






Public

Structure	 ? Conduct ? PerformancePublic policies that aim to prevent

policies that aim to prevent the abuse of market

power
Preventing mergers beyond a certain scale [STRUCTURE]
Price controls, restrictions on collusion [CONDUCT]
Policies that also affect firms’ PERFORMANCE

Competition policy and SCP

Not allowing M&As
Taxation
Price controls


Слайд 23 Profits in America and the practical relevance of

Profits in America and the practical relevance of IOSource: ‘Too much

IO
Source: ‘Too much of a good thing’. The Economist,

2016.
Profits have risen in most rich countries over the past ten years.
E.g. America Airlines: Used to make losses; but made $24bn profit in 2015.
How? The falling price of fuel has not been passed on to the consumers.
Why not? Consolidations has left the industry with 4 dominant firms with many shareholders in common.

Слайд 24 Profits in America

Profits in America

Слайд 25 Profits in America - Historical developments
In the 1990s American

Profits in America - Historical developmentsIn the 1990s American firms faced

firms faced a wave of competition from low-cost competitors

abroad.
In 1998, Joel Klein (DoJ), declared that “our economy is more competitive today than it has been in a long, long time.”
How to explain the recent increase in corporate earnings?
Since 2008 American firms have engaged in mergers worth $10 trillion, allowing the merged companies to increase market shares and cut costs.
Two-thirds of the industry sectors became more concentrated between 1997 and 2012. The average share of the top 4 firms has risen from 26% to 32%.


Слайд 26 Profits in America

Profits in America

Слайд 27 Profits in America

Profits in America

Слайд 28 Profits in America
About 25% of America’s abnormal profits

Profits in AmericaAbout 25% of America’s abnormal profits are spread across

are spread across a wide range of sectors.
Another 25%

comes from the health-care industry (pharmaceutical and medical-equipment). Patent rules allow temporary monopolies on new drugs and inventions. Much of health-care purchasing is controlled by insurance firms. Four of the largest, Anthem, Cigna, Aetna and Humana, are planning to merge into two larger firms.
The remaining 50% abnormal profits are in the technology sector, where firms such as Google and Facebook enjoy market shares of 40% or more.


Слайд 29 Production and costs

Production and costs

Слайд 30 Production and costs
 

Production and costs 

Слайд 31 Short run production

Short run production

Слайд 32 Short run costs

Short run costs

Слайд 33 Long run costs
In the long-run, firms can change

Long run costsIn the long-run, firms can change their usage of

their usage of all the inputs, including capital, number

and size of factories etc.
LRAC: Lowest cost of producing any given output level when the firm can vary both K and L.
Draw SRAC for all possible levels of K. The curve that enfolds these curves from below is the LRAC.
Compared to SRAC, LRAC decline longer before finally increasing
LRMC: long-run marginal cost

Слайд 34 Long run costs

Long run costs

Слайд 35 Application to oil pipelines
Costs associated with construction and

Application to oil pipelinesCosts associated with construction and operation:Planning and designAcquisition

operation:
Planning and design
Acquisition of clearing the right-of-way
Construction costs
Steel for

the pipeline
Pumps (One time fixed costs)
Electricity to power the pumps (variable costs)
Labor (monitoring personnel) (fixed cost)

Слайд 36 Application to oil pipelines
Electricity costs vary with throughput,

Application to oil pipelinesElectricity costs vary with throughput, but the number

but the number of personnel does not.
The salary of

personnel is avoidable if the pipeline shuts down.

What are the variable costs?
What are the fixed costs?


Слайд 37 Economies of scale
Economies of scale impact the LRAC









Minimum

Economies of scaleEconomies of scale impact the LRACMinimum efficient scale =

efficient scale = output level beyond which firms can

make no further savings in LRAC through further expansion.

Economies of scale

Indivisibilities
Learning economies
Purchasing economies
Transports economies

Diseconomies of scale

Long chains of command
Strained communications
Bureaucracy


Слайд 38 Economies of scale

Economies of scale

Слайд 39 Empirical studies of economies of scale
Some firms have

Empirical studies of economies of scaleSome firms have U-shaped LRACHowever, manufacturing

U-shaped LRAC
However, manufacturing firms often have L-shaped LRAC
Estimates of

MES:


Слайд 40 Empirical studies of economies of scale
Survivorship studies: If

Empirical studies of economies of scaleSurvivorship studies: If a particular plant

a particular plant size is efficient, eventually all plants

in that industry should approach that size.
Example from the beer industry:

Слайд 41 Economies of scope
Economies of scope are the cost

Economies of scopeEconomies of scope are the cost savings that arise

savings that arise when a firm produces two or

more outputs using the same set of resources.
Example 1: Manufacturing process
Oil refineries produce gasoline and kerosene as part of the refining process
Example 2: Knowledge gained from developing, producing, or marketing one product can be applied to another product
R&D investment for a specific software can benefit other categories of softwares

Слайд 42 Economies of scope
Example 3: Umbrella advertising
Advertising one Samsung

Economies of scopeExample 3: Umbrella advertisingAdvertising one Samsung product will lead

product will lead to more demand for other Samsung

products (even if they are not related).
New products are easier to introduce when there is an established brand with the desired image.
Virgin: 400+ companies, active in railways, airlines, soda, mobile, media etc.


Слайд 43 Demand elasticity
 

Demand elasticity 

Слайд 44 Demand elasticity
 

Demand elasticity 

Слайд 45 Demand elasticity

Demand elasticity

Слайд 46 Demand elasticity

Demand elasticity

Слайд 47 Cross-price elasticity of demand






CES>0. Goods 1 and 2

Cross-price elasticity of demandCES>0. Goods 1 and 2 are substitute. As

are substitute. As the price of Good 2 increases,

consumers switch from Good 2 to Good 1.
CES<0. Goods 1 and 2 are complement. As the price of Good 2 increases, demand for Good 1 decreases.
CED=0. Goods 1 and 2 are independent.

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