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A presentation on the SCP paradigm in industrial economics, focusing on market concentration, economies of scale, and oligopoly pricing. The presentation covers the determinants of market structure, measures of concentration, economies of scale, and economic theories of oligopoly pricing. The document also discusses the persistence of profits above the norm and the challenges to the SCP paradigm.
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Marco Grazzi^1 (^1) LEM, Scuola Superiore Sant’Anna, Pisa
Scuola Superiore Sant’Anna Doctoral Program in Economics
1 I.O. Paradigms
(^2) Structure Concentration The Determinants of Market Structure Stochastic determinants of market structure
(^3) Conduct Oligopoly Pricing
(^4) Performance
S-C-P “New” IO Ind. Dyn
Technology Cost Cost Func Tech. Paradigm Function + R&D & Trajectories
Nature Black Box Black Box Knowledge of Tech + contracts Capabilities
Actors Firms Firms Firms, Univ.
Interactions Competition Competition Competition (market) (market) Cooperation
Behaviors Fixed Strategic, Routines, Response game theor adapt learning
Costs; Demand; Technology ww
Market Concentration; Product Differentiation; Barriers to entry; Vertical Integration; Diversification ww
Pricing behavior; Product strategy & advertising; R&D; Investment ww
Efficiency; Profitability; Technical progress
Degree to which production in a particular market or industry is concentrated in the hands of a few large firms. Market (product, industry) Vs aggregate (nation, global) concentration Historical trends I (^) Share of largest 200 corporations in 1929 ∼ 49% (Berle and Means, 1932) I (^) Aggregate concentration appears to have increased very little after 1929 (see data from Federal Trade Commission (FTC) and Census Bureau).
Reciprocal of firm numbers: 1/n I (^) Drawback: a sales transfer will leave this index unchanged. Concentration Ratio: proportion of industry output accounted for by the r largest firms, r arbitrary number.
Cr =
∑^ r
i= 1
xi x
∑^ r
i= 1
si (1)
I (^) Drawback: arbitrary selection of r AND only a single point on the concentration curve is taken
Define a unit-free measure of the inequality in firm market shares as: c = σ/¯x (coefficient of variation) Then, since
c^2 =
n
i= 1
nx^2 i /¯x^2 − 1 (4)
it is possible to rearrange and write
c^2 + 1 n
HH depends both on market share inequality (as c^2 ) and on firm numbers, n.
In monopoly is max: HH = 1 (c^2 = 0 , n = 1); and is min (HH = 0) for the case of many small equally sized firms.
See Census of Manufacturers Concentration Ratios, US data. Concentration ratios 2002 Firms are assigned to industry (or product) on the basis of their main activity. Some 6 digit sectors I (^) Soft drink manufacturing (312111): 4 largest 50% I (^) Men’s and boys’ cut and sew apparel contractors (315211) and Women’s (315212): differences between the two. I (^) Electronic computer manuf (334111): concentrated Certainly concentration matters and varies a lot across sectors
The shapes of the distributions change a good deal, while the means of the distributions vary much less.
The modal value of the concentration rates falls from the mid-80’s to the mid-90’s, remaining roughly stable thereafter.
The upper tail gets fatter. An increasing number of sectors displays D^420 (t) statistics above 0.7, meaning that the first four firms in the “world”, as defined in the Osiris dataset, in a particular sector, accounts for more than 70% of the top 20 firms in the same sectoral data record.
Note also that the lower tail seems to be remarkably stable over the last two decades.
-0.
0
1
2
3
4
0.3 0.4 0.5 0.6 0.7 0.8 0.
2004- 1995- 1985-
Figure: Probability densities of the sectoral concentration index D^420 in terms of total sales, different years (kernel estimates). The support of these densities is [0.3 0.95]. World’s largest firms Osiris (2005) database.
Product specific economies of scales I (^) are associated with the volume of output of any single product made and sold (from OECD). I (^) Such economies generally arise by avoiding the costs of interrupting production and re-tooling that is required in order to produce different products with the same machinery and equipment. I (^) An essentially product specific economy of scale stressed by Adam Smith comes from division of labor: with larger output workers can specialize. I (^) Stigler’s “The division of labour is limited by the extent of the market” I (^) Fall in unit cost due to learning by doing
Plant specific economies of scales I (^) Plant specific economies of scale are associated with the total output (frequently encompassing many products) of an entire plant or plant complex. Economies of scope may be embodied as part of plant economies as the costs of common overheads, e.g., head office administration and accounting costs, are spread across multiple products (from OECD). I (^) In chemical and metallurgical type industries the most important economies of scale at the plant-specific level come from expanding the size of the individual processing units. I (^) The output tends (whithin physical limits) to be roughly proportional to the volume of the unit, while the amount of material required for construction is more closely proportional to the surface area of the unit’s reaction chambers F (^) So called two-third rule. Area of a sphere or cylinder varies as the two-thirds power of volume, the cost of constructing process industry plants can be expected to rise as the 2/3 power of their output capacity
What determines which operations are performed internally and which outside the firms? Coase (The nature of the firm, 1937) observed that the distinguished mark of a “firm” is the “suppression of the price mechanism”. Resource allocation in the market is normally guided through prices, but within the firm the job is done through decisions of managers. Activities are collected in “firms” when transaction costs incurred in using the price mechanism exceed the cost of organizing internally. Arora, Fosfuri and Gambardella’s “Markets for Technology” I (^) IPR facilitates the emergence of markets for technology I (^) i.e. Biotech firms that only do R&D to patent and license I (^) i.e. The design of the chip is outsourced
Did technological revolutions had any relevant impact on the (horizontal and vertical) boundaries of the firm? (Dosi, Gambardella, Grazzi and Orsenigo) If the markets for technology paradigm applies extensively to most (beyond high tech only) sectors one should expect a shift (downsizing) of the firm size distribution. More exchanges in the market than within the firm. Apparently this is not the case, at least in US, Italy and other countries
