The SCP

Paradigm
Introduction: What is the Concern?
1. The ultimate concern of any
society/country/region/community/ is to attain
pre determined objectives. Performance refers to
the degree of success in achieving stated
objectives.
2. But, What explains the performance of a firm?
Alternative theories.
• Market structure determines performance, p=f(S)
• Conduct determines performance, P=f(C)
• There are hybrid of these main paradigms. P=f(S,
C)
 The SCP Paradigm: Introduction
• The SCP paradigm is the First Wave of Industrial
Economics. Many of the issues in this area of economics
date back to Adam Smith in the 18th century.
• The term of Industrial organisation was first coined in
the 1930s, when a group of Harvard economists led by
Edward Chamberlin and Edward Mason offered the first
graduate course in industrial organisation in 1936,
dealing with the pricing policies of large-scale
enterprises.
• Joe Bain and Edward Mason (both from Harvard)
developed the concept “Structure – Conduct –
Performance” paradigm, which is also called the
“Harvard tradition”.
 Theme of the SCP

• There is causal relationship between market

structure, conduct and performance.
• There is a priori relationship between the three I-O
concepts, S-C-P
• The relationship is such that market structure of an
industry determines or strongly influences the crucial
aspects of its market conduct, which in turn directly or
indirectly determine important dimensions of its
performance.
• Because of the accord given to Structure, the SCP
paradigm is called structuralist approach, or the
Harvard tradition
 Ctd. Theme of SCP
• ourSimplest version of this
approach: There is uni-direction
and linear relationship between
the three variables.
Basic Condition Structure
Conduct  Performance
• The generic functional
presentation of this relationship
Martin, S (1988): The Interactive Structure – Conduct – Performance
Framework

Profitability
Progressiveness

Structure
Technology

Strategy Performance
Demand

Conduct

Sales Effort
Barthwal, R.R. (1984) version: Framework for Industrial Economics

Basic Conditions
•Social and political choices
•Technology
•Economies of scale
•DD & SS, Elasticities, tastes etc.
•Input prices; business attitudes; product
durability; regulation;

Market Structure
•Concentration;
•Size distribution, No. of firms;
•Barriers to entry;
•Monopolistic competition;
•VerticalConduct
Market integration, etc. etc.
•Price policy;
•Product policy, financial policy;
•R&D activities;
•Advertisement;
•Collusion, etc. etc.
Market Performance
 Brief definitions of the main concepts
1. Basic Conditions: the supply and demand aspects of an
economy including policies that affect them.
 The demand side: market size(income level, size of population),
elasticity of demand, availability of substitutes; etc
 supply side: technological development, business attitude/culture/,
input supply, size of the industry, physical & social infrastructure;
 Public policies that affect both the supply and demand sides: Taxes
and subsidies, trade rules, antitrust laws, price controls.
2. Market Structure: the pattern or form or manner in which the
constituent(sellers & buyers) parts of market are arranged together. It
deals with the characteristics of the organisation and composition of a
market that seems to exercise a strategic influence on the nature of
competition and pricing within the market.
3. Conduct: the strategic decision about pricing and output,
investment, marketing, R&D, Advertisement, Legal Tactics
 Policy Implication of the SCP Paradigm

• Firms inherently make every effort to gain market power

and once they have acquired it, they develop entry barriers,
and minimize competitive pressure. After all, easy life is the
reward of monopolistic power in any market.
• Monopoly is understood as the cause of inefficiency & non-
optimal resource allocation. Hence it is undesired outcome.
• Government intervention only to rectify the imperfection of
markets. Thus governments should enact anti-monopolist
(anti-trust) law to rectify market imperfection. Essentially it is
for a neutral industrial and trade policy
• Nothing more! No other economic roles of the government
are considered.
 Critics and Alternative Theories: from within the SCP paradigm

1. Complex and interactive relationship

between S-C-P:
 Instead of linear & unidirectional, complex &
interactive relationship between SCP
variables:
• Complete reversed causation, P→C→S
• partial reversal, like P→C or P→S or C→S or
C→P;
• Simultaneous Causation, where C→S and at
the same time S → C.
 Critics : from Chicago school
1. Methodology based critics: the SCP paradigm is non-
theoretical, rather empirical which is less powerful in
predictive ability than the traditional perfect competition
model.
2. Critics on the Theory of Competition and Monopoly
• Monopoly if not beneficial it is benign to economic welfare:
it is source of efficiency, R&D investment & technological
development, hence sustainable development.
• Monopoly is temporary not a permanent condition, b/s
competition is a dynamic process. competition like gravity is
an ever present reality. If competition is a permanent feature
of an economy then monopoly, which is the outcome of a
competitive process can not be a permanent phenomenon.
Competition eventually erodes away monopoly position of
firms.
 Policy Implications of the Chicago School
• What do you think are the policy implications?
• Remember for Harvard school there is the
need to identify circumstances requiring
government intervention,
• For the Chicago school unconditionally there
is no need for government intervention
including anti trust policy. No government
intervention in whatever form: so antipathetic
to government intervention.
 Conclusion: What do you learn from the chapter?

• In general however, without implication

as to the direction of causality among
three variables, structure, conduct and
performance, each of them remains
important element in the study of
industrial organization. So the study of
industrial organization amounts to
fleshing out the relationships between
the three concepts.
 Question for Reflections
1. What do you understand by the SCP paradigm?
2. Why do we call the SCP paradigm as the structuralist approach?
3. What are the policy implications of both the SCP paradigm & the
Chicago school? Compare and contrast
4. What are the major critics of the SCP paradigm?
5. What are the major differences between the SCP paradigm and
the Chicago school of thought?
6. What is the scope of discretionary power for a firm in both the
SCP paradigm and the Chicago school? explain
7. What is the significance of market imperfection to both the SCP
paradigm and the Chicago School? Compare and contrast
8. Does the SCP paradigm recognize the discretionary space of
firms? Explain
9. What do you understand by competition as a process and
monopoly as a transitory phenomenon?
THANK YOU VERY MUCH!!