Chapter 7 Slides.ppt-Managerial Economic...
Chapter_7_Slides.ppt-Managerial Economics & Business Strategy Chapter
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Chapter 7 Slides.ppt-Managerial Economics & Busine...
Chapter_7_Slides.ppt-Managerial Economics & Business Strategy Chapter
Chapter 7 Slides.ppt-Managerial Eco...
Chapter_7_Slides.ppt-Managerial Economics & Business Strategy Chapter
Page 1
Managerial Economics &
Business Strategy
Chapter 7
The Nature of Industry
McGraw-Hill/Irwin
Michael R. Baye,
Managerial Economics and
Business Strategy
Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.


Page 2
Overview
I. Market Structure
Measures of Industry Concentration
II. Conduct
Pricing Behavior
Integration and Merger Activity
III. Performance
Dansby-Willig Index
Structure-Conduct-Performance Paradigm
IV. Preview of Coming Attractions
7-2


Page 3
Industry Analysis
Market Structure
Number and size of firms.
Industry concentration.
Technological and cost conditions.
Demand conditions.
Ease of entry and exit.
Conduct
Pricing.
Advertising.
R&D.
Merger activity.
Performance
Profitability.
Social welfare.
7-3


Page 4
Approaches to Studying
Industry
The
Structure-Conduct-Performance (SCP)
Paradigm:
Causal View
Market
Structure
Conduct
Performance
The
Feedback Critique
No one-way causal link.
Conduct can affect market structure.
Market performance can affect conduct as
well as market structure.
7-4


Page 5
Power of
Input Suppliers
Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints
Power of
Buyers
Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints
Entry
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Network Effects
Reputation
Switching Costs
Government Restraints
Substitutes & Complements
Price/Value of Surrogate Products
or Services
Price/Value of Complementary
Products or Services
Network Effects
Government
Restraints
Industry Rivalry
Switching Costs
Timing of Decisions
Information
Government Restraints
Concentration
Price, Quantity, Quality,
or Service Competition
Degree of Differentiation
Level, Growth,
and Sustainability
Of Industry Profits
Relating the Five Forces to the SCP
Paradigm and the Feedback Critique
7-5


Page 6
Industry Concentration
Four-Firm Concentration Ratio
The sum of the market shares of the top four firms in the defined
industry. Letting S
i
denote sales for firm
i
and S
T
denote total
industry sales
Herfindahl-Hirschman Index (HHI)
The sum of the squared market shares of firms in a given industry,
multiplied by 10,000:
HHI = 10,000
w
i
2
, where
w
i
= S
i
/S
T
.
T
i
S
S
w
where
w
w
w
w
C
1
4
3
2
1
4
,
7-6


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