Презентация Industrial Economics A: Structure, Conduct and Performance ( lecture 1 ) онлайн
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Слайды и текст к этой презентации:
№1 слайд
Содержание слайда: Industrial Economics A:
Structure, Conduct and Performance
Lecture 1
№2 слайд
Содержание слайда: Module logistics
See the module outline for details.
Some highlights:
Textbooks:
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).
№3 слайд
Содержание слайда: Module structure
№4 слайд
Содержание слайда: What is industrial organization?
IO is the application of microeconomic theory to 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
№5 слайд
Содержание слайда: What is industrial organization?
IO increases our understanding of problems faced by 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.
№6 слайд
Содержание слайда: IO and policymaking
For policy makers:
Competition policy aims to prevent firms 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?
№7 слайд
Содержание слайда: IO and policymaking: The Google
antitrust case
2010: The EU commission accuses Google of promoting 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.
№8 слайд
Содержание слайда: IO and policymaking: The Google
antitrust case
Google could face a 3bn euros fine.
Related to 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?
№9 слайд
Содержание слайда: Typology of market structures
№10 слайд
Содержание слайда: Austrian School: Schumpeter
Dynamic theory where markets are changing due to 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
№11 слайд
Содержание слайда: Creative destruction:
The music industry
№12 слайд
Содержание слайда: The Chicago School
The Chicago School (1970-80s): Also argues 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
№13 слайд
Содержание слайда: The SCP paradigm
Concentrates on empirical analysis rather than on theoretical analysis.
Bain (1956): There is a causal relationship between concentration and profitability:
№14 слайд
Содержание слайда: The SCP paradigm
Structure Conduct Performance
№15 слайд
Содержание слайда: The SCP paradigm
According to SCP, relationships between structural variables and 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.
№16 слайд
Содержание слайда: SCP & European banking: Structure
1980s: European banking was 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?
№17 слайд
Содержание слайда: SCP & European banking: Structure
1990-2009: decline in the number of banks
№18 слайд
Содержание слайда: SCP & European banking: Structure
1990-2009: increased level of seller concentration
№19 слайд
Содержание слайда: SCP & European banking: Conduct
Following the deregulation, many 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.
№20 слайд
Содержание слайда: SCP & European banking: Performance
1990-2006: increased profitability despite the lowering of entry barriers.
How to explain the increased profits?
Increased consolidation; Product diversification; Cost-cutting
№21 слайд
Содержание слайда: SCP: Reverse causality?
Structure Conduct Performance
Conduct 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
№22 слайд
Содержание слайда: Competition policy and SCP
Structure Conduct Performance
Public 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
№23 слайд
Содержание слайда: Profits in America and the
practical relevance of 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.
№24 слайд
Содержание слайда: Profits in America
№25 слайд
Содержание слайда: Profits in America
- Historical developments
In the 1990s American 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%.
№26 слайд
Содержание слайда: Profits in America
№27 слайд
Содержание слайда: Profits in America
№28 слайд
Содержание слайда: Profits in America
About 25% of America’s abnormal profits 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.
№29 слайд
Содержание слайда: Production and costs
№30 слайд
Содержание слайда: Production and costs
Long run production function:
Short run production function, K fixed, and assuming L is variable in the short run:
In some cases, L can also be fixed in the short run.
№31 слайд
Содержание слайда: Short run production
№32 слайд
Содержание слайда: Short run costs
№33 слайд
Содержание слайда: Long run costs
In the long-run, firms can change 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
№34 слайд
Содержание слайда: Long run costs
№35 слайд
Содержание слайда: Application to oil pipelines
Costs associated with construction and 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)
№36 слайд
Содержание слайда: Application to oil pipelines
Electricity costs vary with throughput, 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?
№37 слайд
Содержание слайда: Economies of scale
Economies of scale impact the LRAC
Minimum efficient scale = output level beyond which firms can make no further savings in LRAC through further expansion.
№38 слайд
Содержание слайда: Economies of scale
№39 слайд
Содержание слайда: Empirical studies of economies of scale
Some firms have U-shaped LRAC
However, manufacturing firms often have L-shaped LRAC
Estimates of MES:
№40 слайд
Содержание слайда: Empirical studies of economies of scale
Survivorship studies: If a particular plant size is efficient, eventually all plants in that industry should approach that size.
Example from the beer industry:
№41 слайд
Содержание слайда: Economies of scope
Economies of scope are the cost 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
№42 слайд
Содержание слайда: Economies of scope
Example 3: Umbrella advertising
Advertising one Samsung 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.
№43 слайд
Содержание слайда: Demand elasticity
Price elasticity of demand:
Note that PED<0
If , the revenue decreases as P increases. [elastic demand]
If , the revenue remains unchanged as P increases.
If , the revenue increases as P increases. [inelastic demand]
№44 слайд
Содержание слайда: Demand elasticity
Marginal revenue:
If , MR>0. When the demand is elastic, MR>0
If , MR<0. When the demand is inelastic, MR<0
№45 слайд
Содержание слайда: Demand elasticity
№46 слайд
Содержание слайда: Demand elasticity
№47 слайд
Содержание слайда: Cross-price elasticity of demand
CES>0. Goods 1 and 2 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.
№48 слайд
Содержание слайда: Summary
IO views industries as dynamic entities
Practical relevance of IO (competition policy; high levels of concentration)
Theoretical IO: Austrian school, Chicago school…
SCP: empirical approach; conceptual limitations
Review of production and costs concepts
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