Installment_08

A theory which explains how firms maximize profits by increasing market power through practices like collusion, merges and entry barriers

An Industrial Organization framework assuming a casual relationship between:

• industry structure (e.g. number of firms / entry barriers)

• Firm conduct (e.g. pricing)

• Market performance (e.g. profitability)

1. number and size distribution of buyers and sellers

2. Entry and exit conditions

3. Product differentiation

4. Vertical integration and diversification

1. Profitability

2. Growth

3. Product quality

4. Productive and allocative effiency

Entry barriers prevent new competitors, allowing existing firms to maintain higher prices and profits long-term

A measure of how many firms dominate an industry, directly impacting competition and profitability (pi)

1. Neoclassical Theory of the firm:

   • focus: Profit maximization through rational decisions in perfectly competitive markets

   • Assumptions: Perfect information, no barriers to entry

   • Key idea: firms adjust output to where marginal costs equals marginal revenue Bain-type IO Theory:

2. Bain-Type IO Theory:

   • focus: there is market structure / strategic behavior / barriers to entry

   • Assumptions: firms have market power due to entry barriers

   • Key idea: firms use strategies (e.g. pricing / advertising)

1. Competitive Rivalry (Intensity of competition among existing firms)

2. High / low Bargaining Power of Buyers (influence of costumers on prices)

3. High / low Bargaining Power of Suppliers (influence of suppliers on costs)

4. Threat of New Entrants (Ease of entering the market for new competitors)

5. Threat of Substitutes (Risk of costumers switching to alternative products)