Structure-Conduct-Performance Paradigm
Learn the traditional framework for analyzing industry behavior and outcomes.
Market Structure
Firm Conduct
Performance
The Structure-Conduct-Performance (SCP) paradigm suggests that market structure determines firm conduct, which in turn determines market performance. This framework has been the foundation of industrial organization analysis for decades.
# Structure-Conduct-Performance Framework
scp_paradigm = {
"market_structure": {
"definition": "Basic characteristics that determine competitive environment",
"elements": {
"concentration": "Number and size distribution of firms",
"product_differentiation": "Degree of product substitutability",
"entry_barriers": "Obstacles to new firm entry",
"cost_structure": "Technology and economies of scale",
"vertical_integration": "Extent of supply chain control"
},
"measurement": ["Concentration ratios", "HHI", "Entry costs"]
},
"firm_conduct": {
"definition": "Strategic behavior and policies adopted by firms",
"elements": {
"pricing_behavior": "Price-setting strategies and coordination",
"product_strategy": "Innovation, quality, advertising",
"capacity_decisions": "Investment in production capacity",
"strategic_behavior": "Entry deterrence, predation",
"cooperation": "Collusion, joint ventures"
},
"factors": "Influenced by market structure and expectations"
},
"market_performance": {
"definition": "End results of structure and conduct",
"dimensions": {
"allocative_efficiency": "Price equals marginal cost",
"productive_efficiency": "Minimum cost production",
"dynamic_efficiency": "Innovation and progress",
"equity": "Fair distribution of benefits",
"profitability": "Return on investment"
},
"evaluation": "Comparison to competitive benchmark"
}
}
Market Structure Measures
Understand key metrics used to characterize market structure and concentration.
Key Structure Measures:
• Concentration ratios (CR4, CR8): Market share of top firms
• Herfindahl-Hirschman Index: Sum of squared market shares
• Number of competitors and their relative sizes
• Entry barriers and market contestability
Concentration Guidelines:
• HHI < 1,500: Unconcentrated market
• HHI 1,500-2,500: Moderately concentrated
• HHI > 2,500: Highly concentrated
Used by antitrust authorities for merger review
# Market Concentration Measures
def calculate_hhi(market_shares):
"""Calculate Herfindahl-Hirschman Index"""
return sum(share**2 for share in market_shares)
def calculate_cr4(market_shares):
"""Calculate 4-firm concentration ratio"""
sorted_shares = sorted(market_shares, reverse=True)
return sum(sorted_shares[:4])
# Example calculation
market_shares = [30, 25, 20, 15, 5, 3, 2] # percentages
concentration_measures = {
"hhi": calculate_hhi(market_shares),
"cr4": calculate_cr4(market_shares),
"number_of_firms": len(market_shares),
"market_leader_share": max(market_shares),
"interpretation": {
"hhi_level": "Moderately concentrated" if 1500 <= calculate_hhi(market_shares) <= 2500 else "Other",
"competitive_concern": "Medium" if calculate_cr4(market_shares) > 60 else "Low"
}
}
Modern IO Approaches
Explore contemporary methods in industrial organization beyond traditional SCP.
New Empirical IO:
• Structural econometric models
• Game-theoretic foundations
• Demand estimation techniques
• Supply-side modeling and cost recovery
Alternative Approaches:
• Transaction cost economics (Williamson)
• Resource-based view of the firm
• Evolutionary approaches
• Behavioral industrial organization
# Modern IO Research Methods
modern_io_methods = {
"structural_models": {
"approach": "Explicitly model economic theory",