Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

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Market Structure and Market Power

Early industrial economics, working in the Structure-Conduct-Performance framework, examined firms' decisions given the industrial structure. More modern analysis, however, recognizes that firms' strategic behavior will in fact be a major determinant of market structure. Yet despite this change in perspective, it is clear that contemporary industrial economics must still address the issue of market structure, or the way the industry's producers are organized. In turn, this requires that market structure—and its close cousin market power—be well understood in a way that allows distinction between different structures or different degrees of market power.

We know, for example, that markets work well when the market consists of numerous firms, each with a minimal market share. Yet such markets are relatively rare in the real world. Some markets have just two or three firms. Some have ten or twelve of unequal size. In what ways is this difference important? If there are twenty firms, does it matter if one firm has 60 percent of the market and the other nineteen have just a bit more than 2 percent each? Alternatively, can we measure market structure in such a way that enables us to make some inference of market power? Can we create an index that allows us to say how close or how far a market structure is from the competitive ideal? Because such a roadmap could be of great use to policy makers, it is worthwhile to explore the question at some length. ...