conduct structure and performance

7/24/2019 Conduct Structure and Performance

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Two important questions:

i) How much market power do particular frms(industries) exercises?

ii) What are the major actors that determine marketpower?

Theories o Price ark!ups and profts"

Ta#le $"%


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&'P

&'P paradim an industr*+s perormance , its success in

producin #enefts or consumers , depends on theconduct or #eha-iour o sellers and #u*ers whichdepends on structure o market"

. t*pical &'P stud* has two main staes" /irst oneo#tains measure o perormance (throuh directmeasurement rather than estimation) and se-eralmeasures o industr* structure"

&econd econometricians+ studies cross!industr*o#ser-ations to reress the perormance measures ostructure so as to explain the di0erence in marketperormance"

! The rate o return: Profts earned per dollar oin-estment

! The price!cost marin1 How much price is hiherthan '" 2n same case .' is taken as su#stitute o'"

3ate o 3eturn

The relationship #etween 3ates o 3eturn and 4conomicProfts"

2mportant distinction #etween economic and accountinprofts"

! 'apital 'ost! . 5ow -aria#le rather than a stock-aria#le"


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! . well de-eloped rental market helps tocalculate rental rate o capital and economicprofts"

! /or implicit rental rate o capital capital

asset should #e -alued at replacement cost"

What matters to in-estors is the return ater depreciationhas #een calculated"

6 3 , 7a#our 'ost , aterial 'ost , 'apital 'ost6 3 , 7"'" , "'" , (8 9 ) P;"; 86 earned rate o return 6 rate o

depreciation"

8 6 3 , 7a#our 'ost , aterial 'ost ! Pk;Pk;

The relationship #etween 3ates o 3eturn and Price"

"1 The frm+s in-ested capital earn excessre-enues o percent times the -alue o its capital a#o-e

what it would earn i it were in a competiti-e industr* ithe frm+s re-enue in 3= then its rate o return isr=6 @ 3=! 7' , ' ! Pk;A B Pk; 6 r 9 ">

&u#stitutin the -alue o r


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3 , 3=6 ! "> Pk;

Thus to et normal rate o return the 3e-enues wouldha-e to all #* percent o the -alue o capital"

The industries that earn a rate o return o %" timeshiher than the re-enue earned #* competiti-e industrieswould #e charin a price that are onl* percent a#o-e

those that enerate a normal return"

Pitalls in calculatin 3ate o 3eturns

There are eiht pitalls

o .ccountin defnition Cs" economic defnitiono Pro#lems to measure depreciation

o Caluin pro#lems o 3 and D and .d-ertisino .djustment or in5ationo onopol* Profts ma* #e inappropriatel* included in

the calculated rate o returno


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Price , 'ost arin

P , ' 6 ! F%F

P G

' is rarel* a-aila#le" 3esearchers" se Price , .-erae-aria#le cost marin instead o the appropriate pricemarin cost marin"

.C' 6 3 , 7' ! ' I

This creates serious #ias

' 6 C 9 (8 9 ) Pk; I

sin C instead o ' means

P , C 6 ! % 9 ( 8 9 ) Pk; P G P"I"


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!


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! Price , 'ost arins and 2ndustr* &tructure

P , C 6 >"%N 9 >"%> 'J9 ">$ Pk;BPI 9 Other -aria#le

P (">%)= (">E)= (>">E)=

= 6 &tandard errors

! odern &tructure , 'onduct , Perormance .nal*sis

! &utton Theor*: What happens to competition asmarket siLe rows" Does the market #ecome less

concentrated"

! Does other dimensions o the product , such asqualit* promotional acti-it* and 3 and D chane"

! &utton anal*sis markets in which the product iseither homoenous or heteroeneous and considersthe cost o enterin the market or alterin certain

attri#utes or products"

! 4xoenous &unk cost Cs 4ndoenous &unk 'ost

/iure $"%/iure $"E


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! odern .pproaches to measurin perormance

/iure $"KTa#le $"


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conduct structure and performance

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