Market Structure, Behavior, and Performance: Analysis

Structure-Behavior-Performance Paradigm

The structure-behavior-performance paradigm, the basis of traditional industrial organization (IO), examines how companies behave within a given market structure. The new IO, however, inverts this logic, starting with how strategic behavior affects market structure. Both approaches agree that market structure influences market outcomes.

Defining Markets

Standard Production Classification

One method to define markets uses standard production classification. This system builds concentration data, but requires classifying multi-product companies. The procedure is:

1. Classify companies by their main product based on sales.
2. Calculate total sales for each market.
3. Calculate market shares and concentration indices.

Companies enter the same market if their products are substitutable in consumption, measured by the cross-price elasticity of demand (dQ/dP x P/Q).

Antitrust Policy and Imperfect Competition

Cost of Imperfect Competition

A key question in antitrust policy is the cost of imperfect competition. If losses from monopoly power are small, antitrust enforcement may not be worthwhile. However, if the economic costs are high, resources must be allocated to combat power abuse.

Deadweight Loss

Economists measure economic losses from monopoly power using deadweight loss, resulting from prices exceeding marginal cost. In a monopoly, the efficiency loss is half the Lerner index or half the inverse of the elasticity of demand. As demand elasticity increases, welfare loss reduces because other goods become substitutes for the monopolized good.