industrial economics assignment help

industrial economics assignment help

Industrial Economics: Understanding the Dynamics of Industries

1. Introduction

The early studies of various industries produced a wealth of descriptive data, such as the amount of advertising in different industries, and a detailed discussion of the workings of these industries. There were suggestions of the connection between these observations and the functioning of economic theory, but they were, as the authors themselves acknowledge, “no causal models”. Their contribution was to change that. Challenging the conventional wisdom that anti-trust policy at that time placed too little emphasis on the importance of market structure, through time and country variations, they examined the dynamics of industries in productivity leading to the conclusion that the structure-conduct-performance model was inadequate to explain firm dynamics and productivity growth.

Industrial organization is concerned with the working of markets, through the interaction of firms and their customers. It is based on more fundamental assumptions about consumers. Their theory of the firm has been particularly vibrant. They argue that there are lessons deriving from the experience of individual industries and firms that cannot be learned from the study of aggregates. It is the purpose here to draw out some of those lessons.

2. Market Structures and Competition

In multi-layer models like ICN and ITO, the connection cannot be regulated like gas and electricity connections. As a result, the government can moderately regulate the market by setting a price ceiling for connection. However, if they set a lower price like average cost, making it non-profitable for companies, then the company can control the investment in network development and also create a superfluous scarcity in the peak period.

– One firm dominates the market – No close substitutes – Entry is blocked

The monopoly market structure. The key characteristics of a monopoly are:

An individual firm cannot influence the price by its own policies except in agriculture. In agriculture, weather can destroy crops, demand for products cannot easily be predicted, and a glut of products cannot be stored or transported. As a result, prices fluctuate from season to season and from region to region.

– Very large number of firms – Standardized (homogeneous) products – No barriers to entry

The perfect competition market structure. The key characteristics of perfect competition are:

Market structures are described in terms of the number of firms in the market, barriers to entry, and potential product differentiation. The generic market structures studied in this book are:

3. Industrial Organization and Firm Behavior

Then industrial organization, in the footsteps of Wharton, Bain, and Sutton, described in fine-grained detail why and how a firm should deviate in order to affect its local environment. Clearly, a firm does not need to deviate from a Nash equilibrium, where the other firms already comply with the equilibrium conditions found. McKenzie’s proof has no implications for the unraveling of agent comprehension in wealth-sharing arrangements (dynamic contests) or subjects’ behavior with conflicting welfare statements or individual/group payoff statements. Moreover, it is also noted that McKenzie only considers continuous-time zero-sum games without potentially disturbing noise, numerous or sadistic players, and allegiance-biased agents. The industriousness of unlocking mechanism design challenges did not find a listening ear for decades. Towards the end of the eighties, industrial organization perhaps blithely subsumed the area of auction design into its safe harbor of prescription of sales method, and it became merely another aspect of how the problem should be solved in equilibrium.

Once industrial organization (IO) was just a microeconomic topic for policymakers who wanted to understand the interaction of firms in different markets. They built on their workhorse market (the perfectly competitive or atomistic Skinnerian model) as a benchmark. They were then supporting actors of consumers and policymakers who were analyzing the consequences of ignoring this benchmark. Regarding industry equilibrium, they typically focused on static stability analysis based on the doctrine of the structure-conduct-performance relationship. IO as developed by theoretical microeconomics was not really about firm behavior. It was rather a clever model of how industry market shares could be related to market structure. The early empirical work, which tried to explore the reasons for market concentration, stepped forth from a Wallis unbundling of firm behavior, where the extent of market interaction could be treated as an observable parameter.

4. Government Intervention in Industrial Economics

Since the 1920s, the structure, conduct, and performance paradigm and approach, advanced by economists, has implicated that distinctive market structures will reasonably affect the success of the organization and its markets. This has provided impetus for the regulatory process of antitrust aimed at targeting concentrations, public economic policy, and ownership and management of the firm in order to raise competitive output and reduce anti-competitive conduct. Moreover, the success and good performance of the firm within the industry affect the welfare of consumers directly or indirectly. For this reason, it is necessary for governments to intensively investigate the structure and conduct of firms to maintain a healthy industry and to facilitate positive economic welfare.

Although it is often assumed that firms act independently in making decisions, governments have a significant say in how firms achieve their objectives. In essence, industrial economics is a study of the structure, conduct, and performance of the national economy. This implies the method of organization and the types and forms of business in any national economy. Economists have long maintained that the four main market structures of monopoly, oligopoly, monopolistic competition, and perfect competition affect not only the success of the firms in those industries but also the welfare of the consumers. Understanding what determines the structure of the market, variations in conduct and firm performance, and evaluating government policies in the markets are the primary purposes of the study of industrial economics.

5. Economic Analysis and Decision-Making in Industries

Perfect competition is defined by very restrictive prerequisites. The firm must be atomistic, i.e., it is considered to be so small that it cannot influence the general supply and demand relation. Consumers and producers must be price takers, i.e., they must ignore any other influence on market price except those arising from their actions. There must be perfect factor mobility in both short and long terms, and all factors must be homogeneous. Additionally, market activities must be consistent with the assumptions of an infinite and identical organization. In this context, two important results are achieved. At the market level, low prices with low profit margins are expected to generate expansion to the real and long-term equilibrium level of profit (zero) and an increase in the industry’s output. At the firm level, optimum effective size is established, at which average costs should be as low and marginal costs equal to the average. The important property of efficiency in the use of resources is achieved.

Once we have identified the key issues that play in the industries, the question is: how can we use this in our decision-making? Two broad implications are whether markets are expected to work well by themselves, and whether we can manage our operations well in this type of markets. Systematizing, we can distinguish three decision-making contexts: i) the competitive context, i.e., when industries satisfy the prerequisites for perfect competition; ii) the imperfect competition context, i.e., industries ranging from “almost perfect competition” to industries that are practically monopolies; and iii) the competitive strategy context, i.e., how to best position ourselves within a given market setting.

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