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• Early industrial economics examined firms' decisions given the industrial structure.
• Modern analysis recognizes strategic behavior can determine market structure.
• Contemporary industrial economics addresses market structure and market power.

Describing Market Structure

• Rank firms in an industry by size, from largest to smallest.
• Calculate the cumulative fraction of the industry's total output accounted for by the largest firms combined.
• A concentration curve plots the cumulative fraction of output as smaller firms are included.
• The four-firm concentration ratio (CR4) measures the percent of industry sales by the top four firms.
• The eight-firm ratio (CR8) is also often reported.
• CRn is the n-firm concentration ratio.
• Drawback: it omits the other information in the curve.
• The Herfindahl-Hirschman Index (HI) is an alternative:
  • Defined as: HI = Σ (sᵢ)², where sᵢ is the market share of the ith firm.

HI advantages

• The HI reflects both unequal firm sizes and the concentration of activity in large firms.
• HI provides a complete sense of the shape of curve.
• Economists favor HI, since it reflects average firm size and inequality of size between firms.

Measurement Matters

• The ability to measure market structure relies on identifying a well-defined market.
• Difficulty: defining a market can be challenging.
• The North American Industry Classification System (NAICS) categorizes business units' output into sectors.
• Sectors are subdivided and given a two-digit code.
• The manufacturing sector is covered by codes 31-33; retail is covered by 44-45; finance is covered by 52.
• Two-digit codes are disaggregated into three, four, five, and six-digit levels with firms assigned to a specific six-digit industry based on production processes.
• Drawback: NAICS-based measures focus on production technologies less on whether outputs compete.
• Establishments are in the same market if their goods are consumption substitutes.
• NAICS categorizes wood flooring, resilient floor covering and ceramic tile in different groups.
• NAICS data compute market shares on a national basis when local conditions are more important.

Reality Checkpoint - Concentrating on Concentration

• The fraction of the economy's output accounted for by its largest corporations can also be measured.
• Concentration ratios such as CR50 or CR200 are considered in the case of aggregate economic activity.
• Economist Lawrence White calculated such measures for the US through the 20th century.
• Aggregate concentration in manufacturing has shown no increasing or decreasing trend since the 1950s.
• Elaine Tan estimated trends assuming firm sizes are generated by a Champernowne distribution.
• Tan found the asset share of the top 500 US firms increased from 1931 to the middle of WWII, fluctuating until 2000.

Defining product markets

• Goods like newspapers and ready-mix concrete imply local or regional inter-firm competition.
• Passenger aircraft or automobile manufacture shows competition in international markets.
• True product markets substitutes measured by cross-price elasticity of demand.

Cross-price elasticity

• The percentage change in demand for good i to a 1% change in the price of good j
• The equation is: nij = (Δqi / Δpj) * (pj / qi)
• In brief, if n₁j is large and positive then goods i and j is reasonably close substitutes.
• The Department of Justice's and Federal Trade Commission uses market defintion in evaluating mergers called SSNIP standard.
• SSNIP - "a small but significant and non-transitory increase in price".
• Start with the narrowest market definition, like organic product grocery stores such as Whole Foods.
• If all such natural foods grocery stores were monopolized, if the monopolist raise price of goods by 5%?
  • If the answer is yes, then those grocery stores make a relevant product market.

Geography and Vertical Relations

• The SNIPP standard requires geographic space to be identified.
• Determine which printed media constitutes the citywide newspaper market.
• If firms customers located outside of the region than the geographic boundries expand.
• In order for firms to sell in a board regional/glocal market, the markets will need to extend beyond the local region
• Similar process for defining location as to define goods
• Define location and ask whether a firm controlling production within that area can impose small price increases
• Government merger guides point to such alternative to define relevant geographical market.

Elzinga-Hogarty (1978) test

• Test consideres two features, determine legitimate regional market: features LIFO and LOFI

LOFI = Little out from Inside

• 1 - fraction of products consumed within a region, produced Outside

ELZINGA-HOGARTY (1978)

• Suggests those regions in which both LIFO and LOFI exceed 75% indicate well defined geographic market and strong.
• As noted by critical value that used establish the value of market.
• ELZINGA_HOGARTY suggests 90% based on review of history.

Firms and Production

• the relationship Between firms at operation at different sales productin phase. (RAW-Materials) final sale to customer
• Economics jaron the initial raw materials phase is typically the upstream the flow "downstream" with the stages of final sale to consumer. The existence and variability of relations can cause difficulty in messuring any production stage Suggests fairly competitive Markets
• The reality bottling companies dont competitie,strict use contracts of national upstream supplier Pepsi Interpretation structural market measures, endongenon

Structural market vs substitution measure

• Implementation requires careful interpretation
• Geographic definitions( ELZINGA,HOGARTY) are easy to understand, which standard should serve threshold of market determination?
• The point theroetucal world with textbook market well understood, Real world measurement is difficult.

Measuring Market Power

• This chapter is about how the structure of production output is allocated across firms
• Seen summary statistics, attempt to describe configuration, Desirering succinct industry lies relative ideal perfect competition.

Saying industry high concentratation means?

• It means industry output dominated by contrast with competition model. What do the prices Previal in a perfect competition market?

Lerner Index

• Measurement of performence POV
• Measures ideal far from competative market
• The way the equation can be expressed is = (P -MC)/P
• Direct discrepency reflecting price and MARGINAL-Capturing with the exercise in market power
• Competitive firm-Lerner-INDEX. IS ZERO,prices at marginal cost
• Monopoly-LERNER-INDEX-shown for the inverse.LESS elastic, MORE price

Revenue maximization

P+Q=MC

• Equation rearranges to (P-MC)/P=Q to the inverse equation or elasticity less Elastic market

Measuring Markets

• This is more complicated because it requires a certain level to obtain average marginal product cost
• A case straightforward is commodity,so firms.
• Measure is -Lerner-Index=Sum(P-SM)/P

Lerner INdex is powerful TOOL conceptional and REFERENCED remainig text.

Like OR4, Lerder INdeX Sumnary Measure Difference LI is not only an industry production structured measurement but an OUTPUT from Market

Examples to measure

• Greater LI, Farther market.
• More market power is beginng exploded
• Example: ELLison tryget evidence on game theroetric Models of cartel
• Prices time with the 19 the century/Apart from price-war perios
• High degree structure
• calculating runs market is the main problem
• Market definition Clear, LERner Index more Difficult to measure, TRICKIER MEASURE ELASTICItY OF DEMAND

Lerner measure

Small changle Data will increase data is estimated Margin cost ELLison studied PORTER/s estimation is that prices is the cooulsive periiids hall the LARGE ELLISONS

• Suppos each needs incur cost F with setting up estalishment. The result that there may observe high settings, High setting numerous
• Market is negligble

Indices erroneous

• Little compettioon even through any firm SIGNIFICANT market power
• Conversely INDEX Might-UNDERESTIAMTE market power is setting import
• Measure will compare low relative unavabilbel
• The marginal coosts

A recurrent AUthor policy/Just how important in competitttive markets are

• Important to antitrust enforcements prevent losses what are costs
• Economists/measure the economic less causing the economy

The welfare/Deadloss

• Practical measurement is subject to some error
• Small chance results rather large change costs'

How the isuss involved let basic measurement result product

WL (P-MC)*(QC-Q) IT's convenient to expression the

(QC=Q) Elastic demand

(P(P-MC))/P