20 terms

Managerial Economics Exam 2: Chapter 7

STUDY
PLAY

Terms in this set (...)

Market Structure
Number and size of firms: concentration

Technological and cost conditions

Demand conditions

Ease of entry and exit
Industry Analysis
Market Structure

Conduct (pricing)

Performance (profitability and social efficiency)
The SCP Paradigm
How market structure, conduct, and performance interact.

No one-way causal link.

Conduct can affect market structure.

Market performance can affect conduct as well as market structure.
Industry Concentration
Measures the size and distribution of firms within an industry.

Such as:
Are there many small firms?
Are there only a few large firms?
Four Firm Concentration Ratio
The sum of the market shares of the top four firms in the defined industry.
Herfindahl-Hirschman Index (HHI)
The sum of the squared market shares of all firms in a given industry, multiplied by 10,000.
Limitation of Concentration Measures
Market Definition: National, regional, or local?

Global Market: Foreign producers excluded.

Industry definition and product classes. Soft drinks vs. colas.
Rothschild Index (R)
The ____________ ____________ measures the elasticity of industry demand for a product generally relative to that of an individual firm producing the product: R = ET / EF

When an industry is composed of many firms, each producing similar products, this index will be closer to zero because the Ed will approach infinity (EF = ∞) for any single firm.
Barriers to Entry
Patents and copyrights.

Economies of scale, sometimes due to high capital requirements, natural monopoly.

Possibly economies of scope.

Ownership of a unique resource
Conduct: Behavior of Firms
Price markup over costs.

Integration and merger.

Advertising expenditures.

Research and development expenditures.
The Lerner Index
The difference between P and MC as a % of price, a measure of pricing behavior.

L = (P - MC) / P

A measure of the difference between price and marginal cost as a fraction of the product's price.

The index ranges from 0 to 1.

A higher L = a lower Ed.
Mark-Up Formula
P = [1/(1+1/Ed)] MC
Mark-Up Multiplier
[1/(1+1/Ed]
Integration
Uniting 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 scope.

Increase market power.

Gain better access to capital markets.
Vertical Integration
Where various stages in the production of a single product are carried out by one firm.

Example: bauxite to alumina to aluminum
Horizontal Integration
The merging of the production of similar products into a single firm.

Example: YUM brands: Taco Bell, KFC, Pizza Hut, and Wing Street
Conglomerate Mergers
The integration of different product lines into a single firm. Attempt to offset demand cycles, leverage managerial talent, and be pure, nothing in common, or mixed, looking for product extensions.

Pure: Phillip Morris purchased Miller Brewing Co. and General Foods Corp. and Kraft Foods; or

Mixed: PepsiCo and Frito-Lay, ABC and Disney
Lerner Index
Measures the degree to which firms can markup price above marginal cost; it is a measure of a firm's market power.