Structure – Conduct – Performance  Paradigm

An Intro. to the Structure – Conduct – Performance  Paradigm

1. Essentially this approach suggests that the ‘structure’ of any market influences the ‘conduct’ of firms in that market, which, in turn, influences the ‘performance’ of firms in that market. Note, however, that these ‘linkages’ may not always be precise or universal
2. The S–C-P can be useful to firms, business analysts, governments and regulators (for example UK and EU Competition Commissions and The World Trade Organization) in the following ways:
   1. it allows the creation of meaningful ‘categories’ of data,
   2. it is consistent with the ‘neoclassical theory of the firm’ (revise your Introduction to Economics module notes!), which assumes a direct ‘causal’ link between each of the ‘components’.

• Structure: variety of determinants, including number and size distribution of sellers/ degree of ‘concentration’ (Monopoly …?, Perfect competition …………..?, Oligopoly …………….?, Monopolistic Competition ……?) and number of buyers ( compare consumer markets …………., with industrial markets, e.g. aircraft, ships, civil engineers et ); Entry and Exit conditions – Barriers to entry include high ‘startup costs’, strong established ‘brands’, patents/ copyright/trademarks, physical distance etc. ; Product Differentiation: Apple iPod, I-Phone, Playstation. Microsoft, Porsche (uniqueness) compared to a ‘commodity’ petrol?, wheat, A4 writing pad? Consider and categorize the goods/ services you regularly purchase?; The degree of vertical integration in the industry/ market e.g. brewers & pubs, the degree of Diversification of firms in a market

• Types of ‘Conduct ’ by firms in any specific market include:
  • Business objectives: profit max., TR max? short v long term …etc
  • Pricing policies: relates to objectives, e.g. MC=MR = profit max/loss min; or, ‘collusive pricing’ (price fixing-illegal?); ‘predatory pricing’ (illegal!); price discrimination …………….?; ‘price leadership’
  • Product design, branding, advertising & marketing: why do many firms spend huge amounts of money on these …………….. ? Linked to ‘Product differentiation’ mentioned in ‘Structure’ category?
  • Research & Development (R&D): which firms/markets …..? Why ………………? desirable from society point of view?
  • Collusion: meaning?; Why ………..? Forms of collusion ………….? which type of market structure ………?
  • Mergers & Acquisitions: ……? Types: horizontal/vertical? An alternative to ‘collusion’………………..?

Performance:

1. Profitability: Different views: Can be seen as the result of
   1. more efficient production & management (Chicago school);
   2. past investment in R&D, marketing et (Schumpeterian/Austrian school); or, market structure (neoclassical theory of the firm??
2. Growth: e. greater market share (does not necessarily = greater profit!) Why?
3. Quality of products/ services produced: can this be seen as more important than profits? (BMW, Sony, Bose sound system ??) Core Values of a company or pure profit motive?
4. Technological change: generally considered beneficial to ‘Society’, & therefore encouraged by governments!
5. Productive & Allocative efficiency: to maximize ‘social welfare’ (neoclassical theory predictions ………..?)

S-C-P and possible ‘Feedback effects’

We said originally that S influences C, and that C can in turn influence P.

• Here we ask, can the linkages work ‘in reverse’?
  1. Answer, yes, some Consider the following examples:
     1. a merger of two firms (C) will change the market (S) ‘collusion’ (C) again ‘effectively changes’ (S), but this will not be obvious to consumers! Very dangerous!
     2. Technological advance, achieved by R&D (C) can change not only (P) but also the entire market and its (S); consider the
• Internet’s effects on retailing! …………………………………….

Government Regulation / Intervention

• In a ‘Mixed economy,’ the government’s objective is to enable markets to work in the best interest of society; its main focus should therefore be on outcomes, i.e. ‘Performance’. It should seek to gain all the benefits of markets (competition = efficiency = consumer choice = economic growth and increased prosperity = innovation etc.) WITHOUT the disadvantages (collusion, price-fixing, cheating consumers, abuse of power by monopolists etc.)
• To achieve these objectives, governments have established regulators such as ‘Competition Commissions’, the OFT, FSA et
• The Competition Commission is particularly concerned with possible abuses by Collusive Oligopolies, and abuse of ‘dominant positions’  by Monopolist
• Its powers include: imposing fines, blocking M&A’s, breaking up large firms, price controls et
• Is it influencing S, C or P, OR all of them?