INDUSTRIAL ORGANISATION

Industrial organisation

Industrial Organisation

To what extent is the traditional Structure-Conduct-Performance paradigm still a useful framework of analysis in industrial organisation?

The SCP approach is the idea that exogenous types of market structures (S), such as oligopolies, determine the endogenous types of market behaviour (C), such as collusion, which in turn determines the performance (P), such as high profitability. The direction of the causation can also run backwards. The paradigm dominated the industrial organization field from the 1950's. .The approach shows the relationship between the three characters. Traditional SCP approach Figure 1 Source: Worthington, Briton and Rees (2005).

Within the paradigm, performance is the end result of the firm. It can be measured in terms of profitability and efficiency. Performance can depend on conduct of buyers and sellers or market structure. Conduct is the set of strategies firms use. It can include matters such as price practices and policies, advertisement and research and development. Structure is the characteristics that affect the level of competition and pricing in the market. It is normally measured by market concentration. Structure is determined by features like number and size of distribution of buyers and sellers, the degree of product differentiation, existing of barriers to entry etc. Structure and conduct are also influenced by basic conditions. E.g. price elasticity of demand, on the demand side. On the supple side this would include characteristics of the industries technology (Teece, 1984, 87).

Theoretical and empirical studies also show that there have been some assumptions made about the paradigm. One of the assumptions made was by Chamberlin (1933). He said that in the market firms are profit maximises and could freely enter the market. So in the long run price can settle where it equals average cost of production, making firms earn only normal profit which is the long run equilibrium. So firms would have no incentive to leave or enter the market. The Harvard school of thought saw value in this model. (Bangladesh) argues that Firms only produce normal profit because they only have low concentration levels so as a result small profit is made, market share becomes insignificant and products are homogenous so price cannot be influenced. (Bangladesh) (Dögl, 2010, 34).

Another assumption made was by Haine's (1970). He argued that most profitable firms are rather small or medium sized. Baumol (1967) said that profitability is based on the firm's size. However Marcus (1969) argued that this was only applicable to some firms. Worthington, Briton and Rees (2005) also points out that even though firms a profit maximises, the paradigm fails to show how the path by which new equilibrium are reached.

Through studies of industrial organisations, there has been a lot of theory and empirical studies stating the advantages of the paradigm. Ray (1992) states advantage that this model makes it easy to put a firm's data into categories. His research looked at the area of economic education. The structure was the classroom, the conduct was whether or not the students chose to take a weekly quiz test and the ...