a brief overview on how market is structured through competition among the firms and their strategies

1. Analysis of market
structure
The S-C-P approach

2.  Aggregation of some firm numbers
 Could be determined either from the
demand side or the supply side
 INDUSTRIAL ECONOMICS is that
application of microeconomic theory which
analyses firms, markets and industries
(Stigler 1968)
What is an industry

3.  Grouping of firms together based on
certain common characteristics
 Certain factors that describe the state of
the market with respect to competition
among the firms
 The most common market form observed
is that of oligopolies
Market Structure

4. The S-C-P paradigm
 The model used to analyse the framework
of any industry; how does it work
 Structure: number and size distribution
 Conduct: behavior and actions taken by
the firms in the market
 Performance: product efficiency, allocative
efficiency and economic growth

5. Criteria for judgment
 As mentioned that in the real
world, oligopoly is the prominent market
type, both loose and tight, we will
concentrate on the analysis of measuring
oligopolies
 Measurement of market shares describes
the relative position of a firm within the
industry; certain ratios capture the
ralationship between firm numbers and
their respective shares

6.  Concentration ratio- how much of the
total industry output is manufactured by
the largest firms; the popular four-firm
concentration ratio is given by-
 C4 = (S1 + S2 + S3 + S4)/ ST =
w1+w2+w3+w4
 S: sales of individual firms; w: market
share
 A high concentration ratio reflects
monopoly power
Market indices

7. Example- let an industry consist of 6
firms; 4 firms have sales of $1 million
each and the rest two have a sales figure
of $500,000 each. Then the 4-firm
concentration ratio gives-
Total industry sales- $5mn, sales of the top
four- $4mn, therefore C4= 4/5 = .8 or
80%
The ratio lies between 0 and 1; closer to
zero indicates high competition among a
large no. of sellers while a value near to 1
shows low competition within the industry

8. Market indices
 Hirschman-Herfindahl Index (HHI)-it is
a measure of the sum of squared market
shares within an industry i
 by squaring the shares before adding
them up, HHI gives more weightage to the
firms with higher market share. Its
formula is given by-
 HHi= (mkt share1)2+ (mkt
share2)2+…..till n
or HHI =10,000 ∑wi2,

9.  Example- supposing an industry consists
of three firms wherein, 2 firms have sales
of $1mn each and one has a $3mn sales
figure.
 Total industry sales is $5mn, mkt share of
the largest firm-3/5= .6 and it is .2 for the
other two. Thus HHI for this industry is-
10,000[(.6)2 + (.2)2 + (.2)2]=4,400
The index value lies between 0 and 10,000;
a 10,000 value implies the existence of a
monopolist and a zero value speaks the
existence of infinitesimally small firms

10. The table above brings out the comparison
between the n-firm concentration ratio and the
HHI. It is observable that as the number of firms
reduces, HHI rises rapidly. Compared to the 4-
firm concentration ratio which gives a wrong
image due to its design fault, HHI captures the
market shares of all the firms in the industry.

11.  There are other indices relating to the
Conduct and Performance of an industry.
What we’ve seen is the measure of the
market Structure for a given industry.
 Rothschild Index- measure of the demand
condition; how sensitive is an individual
firm’s demand relative to the entire
market
 Lerner’s Index- measuring the behaviour
of firms; how much the firms in an
industry mark-up their prices over their
marginal cost

12.  Thus the S-C-P approach provides the
framework to understand an industry
structure, the way the firms within a given
industry conduct themselves and reflect
on their performance vis-à-vis the
economy
 It makes government policy more
applicable by taking account of the
demand and supply factors that influence
the industry, and finally
 Outlines a regulatory framework within
which organizations need to operate

13. Toasted, eh! Thank you anyway