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Market Structures in Production Economics

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Handbook of Production Economics

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Abstract

Our chapter begins by discussing the structure-conduct-performance (SCP) paradigm, which is an early descriptive literature that provided many of the stylized facts about market behaviors. This is followed by a discussion of the bounds approach, which concentrates on making predictions that can hold across a broad range of industries and is achieved by aiming conclusions based on minimal assumptions. We then briefly talk about commonly used fundamental market structures and illustrate how different combinations of various standard concepts are combined to describe market structures. As dynamic en and markets with product differentiation play important roles in defining market structures, we provide additional information about models with dynamic environments and models with product differentiation in separate sections. We finalize our review by discussing in depth the literature on market structure on innovation, productivity slowdowns and related problems of income inequality.

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Notes

  1. 1.

    Some of these factors may be endogenous, which we will talk about later in the chapter.

  2. 2.

    These papers are inspired by an idea introduced by Shaked and Sutton [98].

  3. 3.

    For additional examples, see Sutton [106].

  4. 4.

    In other contexts, a seminal work on static entry models is Bresnahan and Reiss [18], which examines the strategic entry decisions of small retail firms.

  5. 5.

    Provided profitability is high enough to fully cover economic costs.

  6. 6.

    For example, Aghion et al. [3] define the “Schumpeterian effect” as the effect of increased competition lowering post-innovation rents, thereby reducing the incentive to innovate.

  7. 7.

    The idea that free entry will quickly erode an innovator’s supranormal profit assumes that the innovator’s competition is effective; that the idea embedded in the innovation is copied well and easily; and that being a first mover does not confer a material advantage. While this is not always the case (see, for example, Boldrin and Levin [12]), the topic of intellectual property rights is outside the scope of this chapter.

  8. 8.

    Anne Bingaman, a former Assistant Attorney General for the Antitrust Division in the U.S. Department of Justice during 1993–1996, said the following about rivalry and innovation: “The fundamental thesis of strong antitrust enforcement is that rivalry, not market power, fosters innovation and efficiency over the long run… Antitrust has an important role in preserving the rivalry that spurs innovation.” See Bingaman [9].

  9. 9.

    See HMG [49] for the complete set of guidelines governing antitrust policy in the United States.

  10. 10.

    To see the latter, note that the marginal cost of the old technology is equal to the prevailing price in a perfectly competitive market. Thus, with drastic innovation and exclusive property rights, a perfectly competitive firm will drive its competitors out of the market with the new price and subsequently become a monopolist.

  11. 11.

    Product j = 2 represents the new, substitute technology.

  12. 12.

    Reinganum assumes that ?(c) and pC(c) are nonincreasing and that pI(c) is nondecreasing in c, the intuition being that the successful (unsuccessful) innovator’s flow profits are higher (lower) the greater is the reduction in cost.

  13. 13.

    This is for nondrastic innovations where the reduction in cost is sufficiently close to the drastic level c0.

  14. 14.

    Kamien and Schwartz [55] examine two versions of this model, one with patent protection and one without. We omit the model with patent protection as the results are not affected by the differences in appropriability.

  15. 15.

    Loury shows that the expected arrival date of innovation is strictly decreasing with respect to n when a unit increase in R&D investment by any single firm causes every other firm to invest a smaller amount into R&D.

  16. 16.

    Defined as the ratio of firm i’s marginal cost to firm j’s marginal cost.

  17. 17.

    Aghion et al. [2] concede that product substitutability is a taste parameter. By construction, product substitutability will affect the structure of a firm’s demand. When product substitutability is at its lowest, a firm has no competitors, so the firm will behave like a monopolist. On the other hand, a firm will behave like a perfectly competitive firm when product substitutability is at its highest. Thus, a higher level of product substitutability may be interpreted as a “less monopolistic” market structure.

  18. 18.

    In fact, when an industry consists only of two firms, a larger technological gap will necessarily lead to greater concentration. This relationship does not necessarily hold for an industry with more than two firms, however. When there are three firms with different efficiency levels, for example, the laggard firm could narrow the technological gap with the second-place and leader firm, but the reallocation of sales among the three firms could lead to lower or higher concentration.

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Author information

Authors and Affiliations

  1. Ernst and Young, LLP, Houston, TX, USA

    Devin Garcia

  2. Department of Economics and Finance, University of Texas Rio Grande Valley, Edinburg, TX, USA

    Levent Kutlu

  3. Department of Economics, Rice University, Houston, TX, USA

    Robin C. Sickles

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  1. Devin Garcia
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  2. Levent Kutlu
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  3. Robin C. Sickles
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Correspondence to Robin C. Sickles .

Editor information

Editors and Affiliations

  1. Department of Economics, University of Connecticut, Storrs, CT, USA

    Subhash C. Ray

  2. Department of Agricultural and Resource Economics, University of Maryland, College Park, MD, USA

    Robert Chambers

  3. Department of Economics, Binghamton University, Binghamton, NY, USA

    Subal Kumbhakar

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Garcia, D., Kutlu, L., Sickles, R.C. (2020). Market Structures in Production Economics. In: Ray, S., Chambers, R., Kumbhakar, S. (eds) Handbook of Production Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-3450-3_4-1

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