1、Chapter 7The Nature of IndustryMcGraw-Hill/IrwinCopyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter OutlineMarket structureFirm sizeIndustry concentrationTechnologyDemand and market conditionsPotential for entryConductPricing behaviorIntegration and merger activityResearch

2、and developmentAdvertising Performance Profit Social welfareThe structure-conduct-performance paradigmCausal viewFeedback critiqueRelation to the Five Forces Framework7-2Chapter OverviewIntroductionChapter 6 focused on the optimal way to acquire the efficient mix of inputs, and how to solve various

3、principal-agent problems that arise within the firm.This chapter provides an overview of the nature of various industries.How concentrated are sales in one industry relative to another?How do price-cost margins vary by industry?How do advertising and R&D expenditures vary by industry?7-3Chapter Over

4、viewMarket StructureMarket structure factors that impact managerial decisions:Number of firms competing in an industry.Relative size of firms (concentration).Technological and cost conditions.Demand conditions.Ease of firm exit or entry.7-4Market StructureIndustry Concentration Measures the size dis

5、tribution of firms within an industry.Are there many small firms?Are there only a few large firms?7-5Market StructureMeasuring Industry Concentration7-6Market StructureMeasuring Industry Concentration in Action7-7Market StructureMeasuring Industry Concentration In Action7-8IndustryC4 (percentage)HHI

6、Distilleries701,519Fluid milk461,075Motor vehicles681,744Snack foods531,984Furniture and related products1162Semiconductor and other electronic components34476Soft drinks52891Market StructureLimitations of Concentration MeasuresFactors that impact and limit industry concentration measures include:Gl

7、obal markets.National, regional and local markets.Industry definitions and product classes.7-9Market StructureTechnology and CostsIndustries differ in regard to the technologies used to produce goods and services.Labor-intensive industries.Capital-intensive industries.Within a given industry if the

8、available technology is: the same, firms will likely have similar cost structures.different, one firm will likely have a cost advantage.7-10Market StructureDemand and Market Conditions7-11Market StructureDemand and Market Conditions in Action7-12Market StructureDemand and Market Conditions In Action

9、7-13IndustryOwn Price Elasticity of Market DemandOwn Price Elasticity of Demand for Representative FirmRothschild IndexFood-1.0-3.80.26Tobacco-1.3-1.31.00Textiles-1.5-4.70.32Apparel-1.1-4.10.27Paper -1.5-1.70.88Chemicals -1.5-1.51.00Petroleum-1.5-1.70.88Market StructurePotential for EntryOptimal dec

10、isions by firms in an industry will depend on the ease with which new firms can enter the market.Several factors can create barriers to entry (or make entry difficult).Capital requirements.Patents.Economies of scale.7-14Market StructureConductBehavior of firms:Price markup over costs.Integration and

11、 merger.Advertising expenditures.Research and development expenditures.7-15ConductPricing Behavior7-16ConductPricing Behavior in Action7-17ConductPricing Behavior In Action7-18IndustryLerner IndexMarkup FactorFood0.261.35Tobacco0.764.17Textiles0.211.27Apparel0.241.32Paper 0.582.38Chemicals 0.673.03P

12、etroleum0.592.44ConductIntegration and Merger ActivityIntegrationUniting productive resources of firms.Can occur during the formation of a firm.Merger Two or more existing firms “unite,” or merge, into a single firm.Reasons firms merge:Reduce transaction costs.Reap benefits of economies of scale and

13、 scope.Increase market power.Gain better access to capital markets.7-19ConductTypes of IntegrationVertical integrationVarious stages in the production of a single product are carried out in a single firm. Horizontal integrationMerging two or more similar final products into a single firm. Conglomera

14、te mergersIntegration of two or more different product lines into a single firm.7-20ConductResearch and DevelopmentResearch and developmentExpenditures made by firms to gain a technological advantage, with the aim of acquiring a patent.7-21CompanyIndustryR&D as Percentage of SalesBristol-Meyers Squi

15、bbPharmaceuticals19.7FordMotor vehicle and parts4.1Goodyear Tire and Rubber Rubber and plastic parts2.0KelloggFood1.5Proctor & Gable Soaps and cosmetics2.5ConductAdvertisementAdvertisement Expenditures made by firms to inform or persuade consumers to purchase their products.7-22CompanyIndustryAdvert

16、ising as Percentage of SalesBristol-Meyers SquibbPharmaceuticals4.9FordMotor vehicle and parts3.2Goodyear Tire and Rubber Rubber and plastic parts2.5KelloggFood9.2Proctor & Gable Soaps and cosmetics11.7ConductDansby-Willig Performance IndexRanks industries according to how much social welfare would

17、improve if the output in an industry were increased by a small amount.7-23IndustryDansby-Willig IndexFood0.51Rubber0.49Textiles0.38Apparel0.47Paper 0.63Chemicals 0.67Petroleum0.63PerformanceStructure-Conduct-PerformanceStructure:Factors like technology, concentration and market conditions.Conduct:In

18、dividual firm behavior in the market. Behavior includes pricing decisions, advertising decisions and R&D decisions, among other factors.Performance:Resulting profit and social welfare that arise in the market.Structure-conduct-performance paradigmModel that views these three aspects of industry as b

19、eing integrally related.7-24The Structure- Conduct-Performance ParadigmThe Casual ViewMarket structure “causes” firms to behave in a certain way. this behavior, or conduct, “causes” resources to be allocated in certain ways. this resource allocation leads to “good” or “bad” performance.7-25The Struc

20、ture- Conduct-Performance ParadigmThe Feedback CritiqueThere is no one-way causal link among structure, conduct and performance.Firm conduct can affect market structure;Market performance can affect conduct and market structure.7-26The Structure- Conduct-Performance ParadigmFive Forces Framework7-27

21、Power of Input SuppliersSupplier ConcentrationPrice/Productivity of Alternative InputsRelationship-Specific InvestmentsSupplier Switching CostsGovernment RestraintsPower ofBuyersBuyer ConcentrationPrice/Value of Substitute Products or ServicesRelationship-Specific InvestmentsCustomer Switching Costs

22、Government RestraintsEntrySubstitutes & ComplementsIndustry RivalryConcentrationPrice, Quantity, Quality, or Service CompetitionDegree of DifferentiationLevel, Growth, and SustainabilityOf Industry ProfitsEntry CostsSpeed of AdjustmentSunk CostsEconomies of ScaleNetwork EffectsReputationSwitching Co

23、stsGovernment RestraintsPrice/Value of Surrogate Products or ServicesPrice/Value of Complementary Products or ServicesNetwork EffectsGovernment RestraintsSwitching CostsTiming of DecisionsInformationGovernment RestraintsThe Structure- Conduct-Performance ParadigmLooking AheadPerfect competitionMany, small firms and consumers relative to market.Firms produce very similar products.No market power (P = MC).MonopolySole producer of good or service.Market power (P MC).Monopolistic competitionMany, small