Introduction to Competition

Structure- Conduct-Performance Chicago School Austrian school Theory of contestable markets

Structure- Conduct-Performance
According to the Structure Conduct Performance theory Structure of an industry determines the conduct of firms in an industry. Conduct of firms in an industry determines the performance of firms in an industry The structure of an industry depends on demand and supply conditions in an industry Demand refers to price elasticity of demand, tastes etc. Supply refers to cost, technology etc.

Structure
a) b) c) d) e)
Structure refers to Market Concentration Product Differentiation Entry Barriers Vertical Integration Diversification

Conduct
Conduct refers to the following a) Pricing and Output Strategies b) Degree of co-operation amongst firms c) Anti competitive practices d) Advertising strategies e) Research & Development spending

Performance
Performance refers to the following a) Output b) Growth c) Profitability d) Employment e) Efficiency

Chicago school
Market concentration does not imply abuse of dominant power Chicago view believed in the long-run efficiency of markets Competition would undermine attempts to rig markets If supernormal profits persisted for a long time it may be because a firm possesses unique resources that command scarcity rent.

Chicago school
Vertical integration whereby monopoly exists at all stages of supply chain was not necessarily bad as it may lower costs However, if supernormal profits persisted in the long-run, it would attract new entrants Another area where the S-C-P school and the Chicago school differ is exclusive dealing.

Austrian School
The only real barrier to entry that persists are legal barriers If there are no legal barriers, market concentration is the result of cost conditions in an industry. If a firm is earning supernormal profits this would attract new entrants in the absence of legal barriers. The new entrants would compete away supernormal profits

Austrian school
Government intervention may interfere with the market mechanism. They may protect existing players by restricting entry. Price controls or profit controls may restrict innovation or new product development.

Theory of contestable markets

Theory of contestable markets is propounded by Baumol. Degree of market concentration is not important Competition depends on ability to enter and exit industries without making huge losses Absence of sunk costs; defined as costs which have little or no alternative uses

Theory of contestable markets

If sunk costs are minimal, the market would be contestable. Supernormal profits cannot persist even in an industry characterized by high degree of concentration as new firms would enter the industry to compete such profits away. Existing firms would therefore not abuse their dominant market position.