Syllogism
PROPAEDEUTICS IN THE THEORY OF THE INDUSTRIAL ORGANISATION:
THE SCP (STRUCTURE, CONDUCT, PERFORMANCE) MODEL
Dimitri Uzunidis
De Boeck Supérieur | « Journal of Innovation Economics & Management »
2016/2 n°20 | pages 197 à 215
ISBN 9782807390041
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SYLLOGISM
PROPAEDEUTICS
IN THE THEORY
OF THE INDUSTRIAL
ORGANISATION: THE SCP
(STRUCTURE, CONDUCT,
PERFORMANCE) MODEL
Dimitri UZUNIDIS
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Industrial oragnisation is a particular field of study of economic mechanisms.
Its subject is the organisation of markets and firms and their strategy. It also
aims to develop the tools to implement public policies on market regulation.
Even if it was developed in particular in the 1950s, the industrial organisation field is as old as industry itself. The existence of industrial thinking on
the economy in fact dates back to the 19th century, mainly with the work
of J. S. Mill (1848), and A. Marshall and M. P. Marshall (1879). The former
focused his thoughts on the existence of economies of scale in large firms
using studies by Babbage (1835) on the mechanisation of industrial work.
The second is critical regarding the Marginalists, so in a position of strength
regarding analytical tools such as the function of production and the model
of pure and perfect competition. However, whereas industrial organisation
rejects the figure of the entrepreneur, Marshall pays great attention to the
“captains of industry”. Significant progress was also made during the 1930s,
a period of intense economic crisis that showed the fragility of large industry,
consequently resulting in the S-C-P model (structure – conduct – performance), mainly at the instigation of Mason (1939).
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CLERSE (UMR-CNRS 8019)
Université du Littoral Côte d’Opale
Research Network on Innovation, Paris, France
uzunidis@univ-littoral.fr
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First, we will make a brief presentation of industrial organisation through
its definition as a specific theoretical field which aims to study the interactions between the market and its actors by focusing on two approaches.
The first is the traditional industrial organisation, epitomised by the Harvard
School (Mason, 1939; Bain 1959), and which put forward the S-C-P model.
It covers the period from the 1930s to the 1970s. The second approach,
called the New Industrial Organisation (Tirole, 1988), developed in the
years 1980-1990 by being based on game theory and econometric models
while trying to strengthen the theoretical basis of the discipline.
In a second section, the S-C-P model will be presented through the elements that comprise it, as well as the criticisms to which it has been subject,
while always respecting their chronological evolutions. To understand the
S-C-P model we should first return to the basic conditions which have to be
assembled for it to work. Then we will focus on the structure of the market.
The conduct of firms and their performance will be set out in a succinct
manner. Particular mention will be made of competitive barriers, because of
their importance in the model.
Finally, we will discuss the criticisms of the S-C-P model: the criticisms
of followers of the Chicago School on the exogenous nature of the structure
of the market, followed by those of the founders of the theory of contestable
markets on the margin of firms’ profits in an oligopolistic situation, then
those of the evolutionist school, but also those of the followers of the “new”
industrial organisation.
Above all, this article aims to set out as clearly as possible the foundations
on which the reasoning of the industrial economist is based. This reasoning
is consequently the start of the formation of the economics of innovation.
The article claims to be a kind of propaedeutic (knowledge necessary for
learning more specific methods, models, forms, concepts, etc. and the indepth study of existing knowledge) for the theory of industrial organisation.
SUBJECT, EMERGENCE AND CONSOLIDATION
OF THE INDUSTRIAL ORGANISATION
The neoclassical anti-paradigm?
For Carlton and Perloff (1998), industrial organisation is the branch of
microeconomics devoted to the strategic behaviour of economic actors
linked to different market structures (intense competition, monopoly, oligopoly, monopsony or oligopsony, etc.). The industrial organisation is
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Dimitri UZUNIDIS
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therefore interested in analysing firms’ strategy in terms of price and quantities, but also quality, discrimination, spending on research and development, advertising and innovation. Bourlès et al. (2013) also places particular
emphasis on market regulation and the internal organisation of firms. To
summarise, the central problem in an industrial economy is to know how
a company can obtain a competitive advantage and how it can reinforce
this or lose it. How do companies develop strategies to cope with competition on the markets through the choice of pricing policy, the positioning of
products and mobility (market entry, maintenance and exit)? But also, what
kind of industrial policy, competition policy, sectoral regulations or planning
would be the most effective in terms of economic growth, the allocation or
distribution of resources? State intervention here is usually studied by monitoring market structures (mergers or company acquisitions), monitoring the
conduct of firms (agreements and network activities, alliances, ententes)
and monitoring the practices of companies in a dominant position (prices,
contractual clauses with suppliers, etc.).
The industrial organisation was set up as a key field of research on economic analysis at the same time as the neoclassical approach (Marginalism)
saw its theoretical foundations crumble. The development of the company,
the recognition of the “firm”, the entrepreneur as a social function, the State
as an economic actor, etc. one by one destroyed the assumptions (market
atomicity, product homogeneity, transparency of information, flexibility of
factors of production and free market entry and exit) on which the “pure”
neoclassical model was constructed. Market failure, the logical consequence
of more or less concentrated market structures and imperfect competition,
thus became the central question of industrial economics. Indeed, the industrial organisation theory was concerned with imperfect competition through
industrial concentration. A situation which de facto excluded small entities
and prevented other firms from penetrating the market, which would eventually lead to a monopoly. Industrial organisation rejected the hypothesis
of free market entry or exit or of market fluidity, and emphasised the role
of competitive barriers (barriers to entry, to exit, to mobility) in the market
created by the State or, more frequently, by companies’ strategies or games
(regulatory barriers, induced by the conditions of production and commercialisation, to entry, mobility and exit). The hypothesis of the homogeneity of products is also questioned because firms (and more particularly large
firms) are more interested in product differentiation and the diversification
of their activities by implementing permanent innovation strategies or
global financial strategies (Uzunidis, 2004) than their actual everyday life;
while many small firms specialise in commercial niches that lifet barriers
to entry by developing a specific advantage or a price advantage. Finally,
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Propaedeutics in the theory of the industrial organisation
Dimitri UZUNIDIS
industrial economists disapprove of the hypothesis of perfect information,
industrial economics reasons in terms of imperfect information, thus joining
information economics (Akerloff, Stiglitz, Spence), according to which one
of the causes of market failure is the retention, protection or, in general, the
asymmetry of information.
The structuring of industrial organisation
During its evolution, the industrial organisation field experienced two
approaches that were distinct but which complemented each other: the
traditional industrial organisation of the years 1950-1960 and the “new”
industrial organisation from the years 1980-1990 (Balasse, 2003; Dupuy,
Marchesnay, 1982).
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In this approach, the market structure (number of sellers, degree of product
differentiation, cost structure, degree of vertical integration) defines the conducts or strategies of firms (price, quality, R&D, investment, advertising),
which in turn determine the performances of these in the market (efficiency,
profit, innovation). The first conception of the industrial organisation is
mainly constructed from statistical studies, with no theoretical framework, a
limit that consequently led to the discipline being changed.
This school of thought is epitomised by what is called the Harvard
School, the prestigious American school of economics whose founders were,
among others, Mason (1939, 1959) and Bain (1956), who were the first to
apply the S-C-P model to explain the relationship between market structure, the conduct of firms and their performances. The empirical work in
this period tried to explain the rate of profit of firms through two essential
variables of market structure: industrial concentration and barriers to entry.
Mason made a basic criticism of the microeconomic approach. His analysis is hybrid, half theoretical and half empirical. He believes that theory
can be useful to identify the structural variables and relevant behaviour, but
the relationships between the variables should be established by empirical
analysis. The methodological empirical choice concerns the use of statistical
data or surveys by questionnaires. Mason then talks of a field of research that
is “muddy but not uninteresting”.
To be operational, the concepts used by the microeconomics to report
on monopoly power (the elasticity of the demand curve, for example),
assume that the industrial economist knows the shape or the gradient of
these curves. But these curves are not derived from observation but from
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The traditional industrial organisation approach
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theoretical axioms which, for Mason, makes them useless. His project
consisted solely in studying market structures and the conducts of firms.
The economic problem here is to explain the differences in competitive
practices relating to policies on price, production and investment through
examining market structure and the organisation of firms. Such a concern
first involves the development of a classification of market structures, which
is in fact likely to allow the often numerous and heterogenous data to be
put in order and thus to try to draw from observation a certain number of
general rules relating to the relationship between these structures and the
conduct of firms. The proposed classification should first be undertaken in
the context of the sectors defined as the merging of firms operating on the
basis of a similarity between products and between the processes of production. Then it should be based on the situation of the buyers and sellers
on the market. On the demand side, Mason identifies the similar objective
conditions which characterise a market structure: the economic nature of
the product, the specificity of the process and production costs, the number
and size of the firms, and the extent of barriers to entry. On the side of buyers, he mentions: the number and size of agents, seasonal or longer cycles
of products, the consumers’ knowledge of the quality and characteristics of
the product.
Bain follows the inductive approach. The multiplication of sectoral studies (study method of the Harvard cases) was first of all essential to acquire
a general knowledge of the real functioning of markets. From the combination of these studies he hoped to find material that was vital for developing
general laws and a new theory of prices and of markets. This represents a
second stage of the approach. Bain describes an S-C-P sequence. Two major
differences distinguish him from Mason: the direction of the sequence and
the section on performance. Furthermore, although Bain’s analysis is not
normative, he does not reject traditional microeconomic theory, unlike
Mason. Finally, Bain described very precisely the content of each of the
terms of the S-C-P triptych, which became the toolbox of the industrial
economist: the degree of concentration of buyers, product differentiation
and the conditions of entry to the market. The conducts of firms are more
difficult to describe in a comprehensive way, but they can be understood
through two kinds of behaviour: those which are connected to firms’ pricing
and production policy and those relating to a joint process of adaptation of
the policies of competing sellers in a market. In fact, Bain does not believe
that it is useful to formalise conduct in a very in-depth way, and hopes to
reduce the subjective dimensions of industrial organisation. This is why
Bain is interested in industry or the group of competing firms, and not in
the firm alone. Firms are thought of as actors who are trying to adapt to the
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Propaedeutics in the theory of the industrial organisation
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environment without seeking to act on this. In Bain’s original model, firms
do not have strategic behaviour. In the end, performances are almost always
integrated with an indicator of profitability. The main dimensions of market
performances include the size of profits, productive efficiency, the share of
the costs of commercialisation in total costs, firms’ progress on product and
process innovations. In the end, the S-C-P relationship allows us to declare
a simple result: in an identical market structure, the firms in two different
sectors should have identical performances.
The S-C-P method obtained significant recognition by inspiring the
rules of the American antitrust policy. The antitrust policy operates directly
on market structures and on the conduct of firms in order to modify the
competitive processes and performances. Gradually, the initial plan of the
S-C-P model was modified to introduce exogenous technical-economic
parameters, entirely upstream of the S-C-P model, in other words determining the natural structures of the markets. These parameters are the basic
conditions. These include the functions of production and demand, economies of scale and the effects of learning. Initially, basic questions like the
supply-demand interaction, the appearance of innovation and its diffusion
are pushed out of the field of reflection of the industrial organisation field,
which largely remains static. The existence of barriers to entry is assumed
to allow incumbent firms to benefit from an advantageous position by raising the price above the marginal cost, without potential entrants having an
interest in entering.
The concept of barriers to entry is at the heart of the S-C-P model. It
appeared with Bain in 1956, who made it a structural factor of markets.
Originally, Bain had three kinds of barrier, those which allow the use of
growing productivity, depending on the size of the production unit, absolute cost benefits, and product differentiation. Economies of scale exist,
in fact, when production of goods takes place with growing productivity.
The incumbent firms can, then, at least up to a certain point, reduce their
average cost by increasing the scale of their production. Consequently, for
a production technology that is identical for all firms, the entrants trying
to enter a market are obliged to produce at a supposed minimum optimal
size, so as not to suffer a clear cost disadvantage vis-à-vis incumbent firms.
Economies of scale mainly originate in the indivisibility of production processes so these are, therefore, naturally dependent on the specificity of the
technology used. The existence of economies of scale can lead to a relative
blockage. But an absolute blockage to entry is possible. The efficiency of barriers to entry should be estimated by comparing the minimum optimum size
(that for which the economies of scale are the strongest) with the function
of demand. The entry of an additional firm can lead to a surplus of supply on
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Dimitri UZUNIDIS
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the market that is likely to bring the price down below average costs. Entry
is therefore prevented. The absolute advantages of cost are also likely to
protect incumbent firms, with regard to potential entrants. So a new entrant
should produce at an average cost that is higher than that borne by firms
that already exist.
These barriers to entry are generally assimilated in the differences in production techniques between incumbents and new entrants. For example, the
incumbent firms have filed patents, guaranteeing the exclusive use of more
efficient techniques. They can also refer to privileged knowledge on the
employment market, or intermediate products, raw materials, making this a
reality by means of a cost differential to the advantage of established firms.
Product differentiation refers to a market characterised by a lack of
homogeneity of the goods produced by different competitors. Goods are,
then, to different degrees, imperfectly substitutable. Cross-price elasticity
between two goods measures this differentiation, with regard to the (subjective) preferences of consumers. This differentiation can create a deep
attachment by consumers to the products of incumbent firms, and thus represent real barriers to entry. In short, according to Bain’s definition, conditions of entry are determined by the advantages enjoyed by firms established
on the market, compared with potential entrants. Barriers exist, then, if an
entrant cannot achieve a level of profit equivalent to incumbent firms. For
Bain, barriers to entry are structural and are derived directly from basic conditions, which determine the structures which are considered to be variable
only in the long term. The technology is assimilated into a basic condition,
thus creating a technological determinism. Behaviour is passive and it is
difficult to understand how firms are capable of benefiting from the technological asymmetries that are needed for technological competition to be
established.
However, one of the great weaknesses of this approach is that the initial
S-C-P triptych is quickly transformed into an S-P diptych, virtually ignoring
the variables of firms’ conduct (Encaoua, 2015) and focusing excusively on
the structure of the market. The variables of conduct are sometimes dealt
with by this so-called structuralist movement to illustrate the behavioural
effects on the evolution of market structures and on firms’ strategic choices.
The “new” industrial organisation approach
This new conception of the industrial organisation developed from the
1980s, with the aim of providing it with some theoretical foundations,
by relying on game theory and statistical and econometric techniques in
the economic analysis of markets, which has allowed the construction of
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Propaedeutics in the theory of the industrial organisation
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theoretical models, and then to test them empirically (cf. Tirole). Its specificity lies in the fact that it has introduced modelling (theoretical proposition/empirical test) in a context marked by industrial concentrations but
also by the great interest of public policies for problems of imperfect competition, of regulation and competition policy.
The “new” industrial organisation distinguished itself from the empirical approach through a new methodology, epitomised by the tradition of
the Chicago School. The latter was based on the need for a rigorous theory
that analyses the different causal links characterising industrial organisation
in a competitive economy. The followers of the Chicago School highlight
the fundamental role of potential competition that possible entrants can
exert in the market to control incumbent firms. Laffont and Tirole (1993)
have emphasised the importance of firms’ strategic conduct aimed at modifying structures, thus reversing the relationship between market structure
and firms’ conduct. Criticisms of this movement with regard to the S-C-P
model advise that the number of indicators of size and performance used to
characterise the structure of an industry is too limited, and that studies referring to the S-C-P approach do not take account of important externalities
(Cashian, 2007). The “new” industrial organisation underlines the need to
endogenise the structure of the market and the importance of the concept
of “market power” in this process of endogenisation and actually offers a
strategic reinterpretation of the S-C-P model by emphasising conduct and
strategic interaction in the markets. This new conception underlines that
the structures of the markets and the conducts of companies or firms interact
in both directions, thus the structure of a market will depend on the strategies of companies that are established there.
THE STRUCTURE-CONDUCT-PERFORMANCE
MODEL
The foundations of the S-C-P model
According to the S-C-P approach, the fundamental elements to analyse the
functioning of a market are the basic conditions (namely the physical, legal,
social and economic environment in which the market functions) and, of
course, the variables of structure, conduct and performance. The structure
of the market is found in the characteristics of market organisation, which
influence the nature of the competition and the formation of prices inside
the market (number and commercial size of the economic agents, credits,
barriers). The conduct of the market is found in the models of behaviour
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Dimitri UZUNIDIS
Propaedeutics in the theory of the industrial organisation
used by companies in order to adapt to the market (fixing prices, commercial
strategies, strategies of exclusion or participation, etc.). The performance is
the economic result of the structure and its conduct. It concerns the efficiency of the market at certain levels (occupation, economic well-being,
availability of food, level of supply prices, etc.) and the way in which profits
are distributed in society.
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As emphasised in the first section, the S-C-P model is derived from the
industrial organisation approach developed by Mason (1939, 1959) and
Bain (1951, 1956). The S-C-P model is based on the fundamental idea that
it is the basic conditions of a particular economic regime that define the
structures of the market, which influence the conduct of firms, the latter
then has an impact on their performance and those of the industry. The
measure of the most used market structure is the degree of concentration of
supply and demand in the market, conduct is represented by the strategy of
the firm and performance is assimilated into profitability. It has been used
to analyse the market of a particular product or sector, and industries often
have intermediate structures between perfect competition and monopoly.
According to Morvan (1991), the S-C-P model responds to the desire
to construct an all-embracing method of analysis of industrial economic
realities, empirically verifiable and more usable in a context of the direction of industrial policy. Public policies can be regulation (legal barriers to
entry), anti-trust policies or taxes and subsidies (incentives for investment
and employment). Performances in the context of this model concern those
of firms established in the market, but also overall performances that correspond to a concept of social optimum. Finally, the fundamental relationship
between the S-C-P triptych is very important to judge the appropriateness of
a policy of public intervention in the market, depending on the causal links
between its three components: market structure, the conduct of the firms
and performances of the market. Indeed, when an industry’s performance is
considered to be inadequate from the point of view of collective well-being,
it is sufficient to act on the structure of this by reducing barriers to entry
for new firms and/or the concentration of firms already established in the
market.
The basic S-C-P model is purely structuralist because it favours the
influence of market structure on the actors in the market, however, there
is another movement that sets against it a behavioural or behaviourist conception, questioning the structuralist approach. This conception considers
that firms have strategic room for manœuvre, so strategic conduct which
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Presentation of the model
Dimitri UZUNIDIS
influences the structure of an industry and so the performance of a sector,
and in this case, the S-C-P model becomes C-S-P.
The basic conditions
The basic conditions of the S-C-P model are grouped around supply and
demand. Conditions on the supply side are production technology, raw
materials, the life span of products and the structure of costs (economies
of scale). On the demand side, the basic conditions are elasticities-prices
and revenue, the possibility of product substitution, the rate of growth in
demand and conditions for commercialisation.
Structure of the market
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The behaviour or conduct of firms
The behaviour of firms in the market is identified by the principles, methods
and actions employed by actors intervening to establish their prices. These
are also the strategies that actors use in negotiating prices, the method of
payment and the degree of communication between them. The elements
that make up the behaviour of firms as part of the S-C-P model therefore
consist of the strategy of fixing prices and the volumes produced, investment in marketing and advertising, internal growth (R&D, innovation
strategy, investment), and external growth (merger/acquisition, agreement,
cooperation).
The performance of the market
This is measured directly by the production and commercialisation of
products to satisfy society’s well-being. For Bressler and King (1970), the
performance of the market also relates to the impact of the structure and
functioning of the market, measured in terms of price, costs and volumes of
products. It can also be considered as the ability of producers to market products to consumers, not forgetting the level of margins, which is dependent
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Research on the structure of the market is oriented to the degree of concentration of the market, namely the number of participating agents (buyers
and sellers), the degree of product differentiation and the conditions of entry
and exit in the market (barriers to entry or exit). In Bain’s view the structure
of the market, since it is an organisation, influences the nature of competition and the method of fixing the price of goods or products exchanged in a
strategic way. The structure of the market as part of the S-C-P model therefore consists of the numbers of buyer and sellers, barriers to entry, product
differentiation and the vertical integration of firms.
Propaedeutics in the theory of the industrial organisation
on the level of prices charged. The criteria of evaluation of market performance are, therefore, prices, costs of commercialisation and commercial
margins. We can add the quality of products, the efficiency of production,
the allocative efficiency of resources, technical progress and the evolution of
the market shares of firms.
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Bain noted the strategic importance of barriers to entry in determining the
structures and performances of markets and highlighted economies of scale,
product differentiation and the advantages of absolute cost. He showed that
the presence of these barriers to entry in favour of large firms established
in the market can lead to excessive profits if there are difficult entry conditions. Therefore, the presence of strong barriers to entry has an influence,
not only on the conduct of established firms, but also on the structure and
performance of the market. For Rainelli (1996): “the higher the concentration,
the more firms have a significant monopoly power and the more they tend to adopt
collusive behaviour. If firms are in perfect collusion, they maximise their joint profits and behave as a monopolist would behave”.
Another definition of barriers to entry was put forward by Stigler
(1968), who believed that the latter represent a rent for dominant firms
in the market. One definition was used by the founders of the theory of
contestable markets (Baumol, Panzar, Willig, 1982). Barriers to entry can
be regulatory barriers such as patents granted as an incentive to innovation, or licences granted by the public authorities, but also protectionism
vis-à-vis foreign producers. There are also barriers induced by the objective conditions of production or commercialisation, like the absolute cost
advantages, economies of scale, the effect of experience and access to distribution networks.
The concept of barriers to mobility
This concept of barriers to entry should be explained by considering it from
the viewpoint of applicant firms and not that of established firms. According
to Stigler (1968), one barrier to entry is defined as a production cost (at a
certain level of production by firms already established in the industry. This
concept is questionable because it considers as potential “entrants” in the
market companies created ex-nihilo. But to these new firms should be added
those which are subject to a reorganisation of their activity by entering new
and nearby markets, which is equivalent to an inter or intra-industrial diversification. Consequently, it is better to talk about barriers to mobility. The
concept should be linked to the idea of a strategic group. Caves and Porter
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Barriers to entry
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(1977) divide industries into groups. A strategic group brings together all
the firms who, within the same industry, have very similar characteristics in
terms of the range of products, experience in marketing, advertising etc. The
result of this is a heterogeneity both of the firms and the processes of technological competition inside the industry, by reference to the different strategic groups. The creation of these groups in fact responds to firms’ strategies
of segmentation on the basis of their advantages. “Segmentation is different
from the traditional strategy of differentiation. As differentiation tends to be implemented within strategic groups, it has an effect on the secondary characteristics of
goods. On the contrary, segmentation concerns the basic characteristics of goods”
(Benzoni, 1991, p. 148). The entrant is not obliged to enter into a certain
group, access to which assumes an expertise that is expensive to acquire,
namely very high sunk costs. It can choose to join, temporarily or on a long
term basis, another group that is additional or related to that which it is
targeting, if this additional or related group requires fewer sunk costs or/
and if this entry strategy increases the probability of success in joining the
initially targeted group. Thus the prudent entrant chooses an incremental
entry process, linked to a cumulative logic based on learning and the gradual
acquisition of new skills. This is a sequential entry process.
The creation of barriers to mobility results from the credibility of the
response of established firms and therefore the maintenance of a high level
of expertise to preserve their distinctive advantages. We note that the concept of sunk costs cannot be assimilated with that of fixed costs, for which a
calculation of inter-temporal optimisation can be made. As Gaffard (1990,
p. 229) emphasises, “the fixed cost is a concept that falls within an a-temporal
analysis of production with technologically efficient companies. In contrast, sunk
costs only make sense in relation to a temporal analysis of production which separates the period of building productive capacity from its period of use and which,
by definition, refers to companies that are not technologically efficient. The crucial
question is in fact that of recovering expenditure on investment”, but it cannot be
resolved by referring to an improbable market equilibrium. This very pragmatic approach of a barrier to mobility is certainly valid for one-off studies on the problems of competition in the particular industries. However, it
assumes that the question of the delimitation of strategic groups, and therefore of markets (“relevant market”) is resolved, as well as that of actions that
enable this delimitation to be modified. “The fact remains that a precise border
between strategies of segmentation and differentiation is still difficult to trace theoretically and empirically, in the same way, moreover, as the division of an industry
into different strategic groups poses a problem.” (Benzoni, 1991, p. 148) This
results in a major operational problem in implementing this concept of a
barrier to mobility.
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Dimitri UZUNIDIS
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In attempts to revive the S-C-P model, firms no longer passively put up with
their environment but are able to modify it, at least in part, to transform
the market conditions in which they evolve. In this way, the unambiguous
and linear S-C-P causality is joined by the effects of feedback, particularly
between conducts (firms’ strategies) and structures. We talk of a “behavioural”
approach or “behavioural economics” in contrast with Bain’s “structuralist”
approach, where the structures remain exogenous. For these “behaviourists”
the barriers to entry are to be considered more as the result of deliberate
strategies by incumbent firms. In Bain’s analysis, entry is assumed to only
respond to the level of prices charged. But this variable is not the only one to
determine behaviour, and thus structures. There are multiple strategic nonprice variables, but for incumbent firms these always involve being voluntarily subject to a cost, with a view to obtaining a predicted benefit offsetting
the current loss in a more or less imminent future. We can then talk about
a policy of dissuasion, defining the use of a present market power in order
to weaken potential competitors. Several properties of investments made by
firms are generally used so that dissuasion towards entrants is effective, and
therefore assumed to be rational. Such an investment should be irreversible,
to make the action undertaken credible. The sustainability of the investment
and the observability by entrants of such an action should therefore be taken
into account. The degree of specificity of an industry partly determines this
irreversibility, but it is the concept of “sunk cost”, or unrecoverable cost that
makes this meaning clearer. The entry mechanism is then always considered
to be a choice by identified agents, where the asymmetries of information to
the benefit of incumbent firms are lacking. By influencing the strategic nonprice variables in their own interest (such as the intensity of advertising, the
intensity of R&D, etc.) at the same time incumbent firms change the level
of barriers to entry. It seems necessary to know empirically which strategic
weapons are actually employed. We do not aim to put forward a complete
view of the strategic weapons that allow behavioural barriers to be formed,
but to highlight empirically the existence of the main weapons of dissuasion,
such as the limit price, product differentiation and R&D expenditure.
The theory of the limit price assumes that incumbent firms fix a price at
the level of the costs that entrants have to bear if they choose to enter. The
limit price theory refers to an inter-temporal optimisation of profits through
a policy of regulating entry. From a logical point of view, on the one hand
we can consider that entrants are sensitive to the level of prices charged
in the market before entering. On the other hand, incumbent firms should
be aware that high prices partly determine future entry rates. In this case,
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CRITICISMS AND EVOLUTIONS
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managers can devise limit price strategies to dissuade potential competitors,
especially when the very existence of the firm is threatened (Geroski, 1988).
But other non-price strategic variables would in this way be the main weapons of dissuasion.
Differentiation exists in a market when goods are imperfect substitutes.
This can, then, deliberately result from firms’ strategic action. Advertising
is frequently used in this context. The cost that the entrants are required to
bear is therefore increased if the customer base is relatively loyal in incumbent firms. Nevertheless, advertising is also a way for entrants to make consumers aware of their new products, which may have certain favourable
characteristics and thus facilitate market entry. Advertising is an irreversible
cost, and therefore has a character of “sunk cost”.
For firms, R&D expenditure is a way for them to acquire an exclusive
advantage (at least for a certain period) concerning particular technological knowledge, with a view to being exploited economically. Innovation
in itself can enable entrants to get into a market, but the need to commit
substantial expenditure is likely to slow down the rate of entry, insofar as
the entrants, and more generally small firms, frequently suffer significant
financial pressures (compared with incumbent firms). Nevertheless, small
entrants can seek to place themselves on the fringes of the market and so,
by practising a strategy of product innovation, keep themselves in a market
niche with little competition from larger firms (Acs, Audretsch, 1990). The
advantage that size is commonly assumed to have does not seem to be confirmed with regard to innovation (Acs, Audretsch, 1989).
With followers of the behaviourist approach, non homogenous trends
emerge. Some of their work is directed towards game theory, while other
research is turned towards studies that are essentially empirical. For the latter there is the problem of measuring firms’ strategies. Many have refused to
enter the debate on the role of strategies and have taken refuge in a purely
quantitative approach by trying to explain econometrically the links that
exist, no longer between the different elements of the S-C-P sequence but
between the elements of the S-P chain.
Amongst the empirical studies that actually try to understand the strategies, the most convincing approach for Bernard and Torre (1991) seems to
be Geroski’s approach (1988), which tries to analyse the dynamic of strategies and the movement of firms’ entry and exit. Indeed, the main problem
with these analyses lies, above all, in the tricky problem of the dynamics,
because the consequences of strategic decisions on market structures require
a real awareness of the passage of time. The “behaviourist” approach always
refers to the concept of equilibrium, where time can only have a function
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Dimitri UZUNIDIS
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of modifying the differences, in relation to the point of arrival that preexisted the forces of change (behaviours). At best, the work refers to an
inter-temporal analysis of profit maximisation. Seeking dominant positions
is an essentially dynamic process. The theory of strategic barriers, including
in its developments relating to the role of technology, as soon as it takes on
the purpose of the delimitation of an inter-temporal equilibrium, can only
identify the characteristics from the result of this search. It leaves open the
question of the analysis of the process by which such a result is achieved
(Gaffard, 1990). This approach relating to the dynamic remains strongly
anchored in the classic dynamic of mechanical systems. The concept of
equilibrium plays a central role in explaining the persistance of phenomena
at work in the system studied. But having in mind the concept of equilibrium
implies an insurmountable inconsistency for followers of the “behaviourist”
approach: the behaviour of firms cannot change the market structure in an
endogenous way. Analysis of the level of integration of markets in space and
in time, namely the differences between the price of a product in space and
in time, as measures of the imperfections of markets. Conditions of structure
and conduct are presented as a system of prices which not only identifies the
value of goods traded and services included (storage, transport, processing,
etc.), but also the additional costs due to imperfect situations (monopoly,
collusion, barrier to entry, etc.).
The final stage of the S-C-P analysis is evaluating the efficiency of the
performance of the system of commercialisation. As has been said previously,
performance, according to the founding principles of the S-C-P analysis,
comes from structure and conduct. Its evaluation requires, first, the individuation of a conceptual point of reference (standard) to which to relate. It
then involves the aims or objectives to be achieved by the functioning of the
system. Regarding the first aspect, namely the neoclassical standard, which
models conditions that are almost impossible to identify in reality, this is
sometimes rejected or modified. This is how one resorts to the concepts of
functional competition or the contestability of markets as being the models
that are the closest to the functioning of real markets. Then widespread economic benefits are achieved through the proper functioning of channels of
commercialisation, (see the improvement in the level of well-being), which
should also be used to evaluate the system.
Market performance is therefore a complex multidimensional concept,
which consists of different criteria: Scherer (1980) or Scarborough and Kydd
(1992) group these performance criteria into economic and non-economic
criteria. Economic efficiency corresponds to technical efficiency, operational
efficiency and efficiency of trade. Non-economic criteria of performance
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relate to the context of development: technical innovations and other innovations (progressiveness), fair income distribution (fairness), food security,
employment, transfer of resources between sectors, efficiency of coordination.
The S-C-P model has been criticised many times and has even changed,
but without being completely called into question. Demsetz (1973), of the
Chicago School, was the first to challenge the exogenous nature of the market structure as part of the S-C-P model: he suggested that a positive correlation between the concentration of firms and profitability does not necessarily
reflect the levying of a monopoly rent, but a difference in efficiency between
the established firms. He showed that the most efficient firms increase their
market shares at the cost of less efficient ones. Market structure – and in
particular concentration in one industry – can therefore not be considered
as an exogenous variable (Cubbin, 2001). He also reversed the relationship
between the market structure and performance, and showed that some firms
can obtain better performances thanks to more efficient conduct compared
to competitors, by adopting more relevant technological, managerial and
organisational choices. So, for this movement, other factors, apart from the
market structure and conduct of firms, which influence performance are the
quality of management, organisational choices and capacities for innovation.
Followers of the theory of contestable markets (Baumol, Panzar, Willig,
1982) suggest, however, that the conduct of firms and market performances
do not depend on real structures (the number of actors present on the market), but on the possibilities for firms established in the market to be challenged by other firms, who are inclined to and capable of replacing them.
Thus this potential presence of firms ready to access the market would be
sufficient to challenge the desire of established firms to take the maximum
advantage from a rent situation. This theory suggests the existence of the
possibility that firms in an oligopoly or even monopoly situation do not
have to take an excess from the market because of their vulnerability to the
potential entry of competitors. The contestability of a market assumes that
entries to it are free and exits can happen at no cost or at very low cost, but
the market is not necessarily atomistic. In these conditions incumbent firms,
whatever their number, cannot take maximum advantage of their situation,
or overly exploit their power on the market.
Finally, the evolutionist approach (Nelson, Winter, 1982) challenges the
S-C-P relationship by considering that the structures are in constant evolution in the same way as firms and industries. It emphasises the heterogeneity
of firms’ conduct through different perceptions of basic conditions, objectives
and expertise accumulated over time, and the dynamic nature of the competitive processes to differentiate the classic model from the S-C-P model.
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Dimitri UZUNIDIS
Propaedeutics in the theory of the industrial organisation
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The S-C-P approach falls within neoclassical theory and the acceptance
of market mechanisms as decisive elements of the system at all levels. The
rigidity of the basic model is adapted to the particular conditions of the markets by specific hypotheses on how they function. Finally, these hypotheses
concern the behaviour of the market. From the methodological viewpoint,
they are equally decisive for the analysis of performance. But we have to
ask if the logic of the market, although important, is in fact the only logic
capable of justifying the choice of agents at all levels, but also to what extent
an economic (sub-)system can be separated from its context (other products,
production, consumption), whilst at the same time retaining the possibility
of judging the performance independently of external elements. These are
not secondary questions, because if the diagnosis is badly done, the strategies
to follow to improve performance are also doomed to failure. In these conditions, the S-C-P analysis only retains its validity for a general judgement
on the efficiency of the structure of commercialisation. Furthermore, if real
conditions are taken into account by the frame of reference, they have the
advantage of leading to an overall vision of the problems as well as possible
solutions, which is an important advantage at the operational level.
But the S-C-P model still has its followers. For example, for Cubbin
(2001) it remains correct on the whole: with high barriers to entry and a
strong concentration of firms, the excess profits of the latter will tend to
continue, because he considers that the conduct of firms remains a major
element. For Moati (1999) it still remains an indisputable operational contribution to a sectoral and powerful analysis at a practical level. Thus, despite
the criticisms already cited, the structuralist model still remains essential. It
is in fact a founding paradigm of the analysis of interactions between the
market and companies that establish themselves there. A precursory model
of the work of the traditional industrial organisation, it has provided one
of the ways of understanding many markets, not only those that are strictly
industrial, such as the banking and business sector, or tourist services.
Although the industrial organisation field experienced a major revival in
the 1980s and 1990s with the advent of the “new” industrial organisation,
the basic structuralist model remains an essential model for students, teachers and researchers who seek to understand the dynamics that characterise
market relations. The different criticisms, whether those expressed by the
Chicago School or by the theory of contestable markets, or more recently by
followers of the “new” industrial organisation, are in reality changes made
to the model, without however going on to challenge its relevance (at least
in teaching and research in economics). The most significant point in the
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CONCLUSION
Dimitri UZUNIDIS
evolution of the application of the SCP model to the economic reality is
the study of the dialectic relations between the impacts of the public policy
and the corporate strategic choices on the macro, meso and micro economic
levels (Uzunidis, Laperche, 2011).
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