The concept and essence of the theory (economics) of sectoral markets. Introduction to the subject Industrial Market Theory briefly

home » Cards The concept and essence of the theory (economics) of sectoral markets. Introduction to the subject Industrial Market Theory briefly

Topic 1. Subject of research and features of the theory of industrial markets

Target: get acquainted with the subject of study and the theory of industrial markets.

Lecture questions:

1. Formation of the economy of industry markets as a science.

2. Object and subject of the theory of branch markets.

3. Approaches to the analysis of the organization of branch markets.

4. The concept of market structure. Characteristics of types of market structures

5. Approaches to defining the boundaries of the industry market.

Formation of the economy of sectoral markets as a science.

The theory (economics) of sectoral markets is one of the youngest and most dynamically developing areas of economic science. For the first time, attempts to analyze the sectoral organization of the market were made in the period 1887 - 1915. Between 1933 and 1940 analysis of industry markets is becoming especially popular, which is associated with the economic depression in the world and the desire to reassess the role of competition in markets of different levels. Then in the middle of the twentieth century. interest in this area of research has cooled down a bit, which was associated with a shift in attention to stabilizing the economy and supporting underdeveloped economic regions. However, already in the 1970s. interest in the study of the functioning of industry markets is re-emerging and intensively gaining momentum.

In foreign universities, the economics, as well as the organization, of industrial markets has a longer and richer history of teaching, spanning several decades. In Europe and the United States, courses are given called "Economics" and "Industrial Organization".

The theoretical foundations of this course are developed and presented mainly in the works of Western scientists. Currently, in Russia there are works devoted to this problem.

There is no unified approach to the question of what the “Economics of Industrial Markets” is studying, yet. Another important question is whether this discipline is an in-depth course in microeconomics or whether it is an independent direction. Many foreign experts believe that the name of the discipline does not fully convey the content of the subject of study. This is due not only to the presence of different scientific directions in economic thought in general, but also in microeconomics, in particular.

Literally from English, this course is called "Economics of Industry", in Russia various interpretations are used: "Economics and organization of industry markets", "Economics of industry markets", "Theory of industry markets", "Theory of organization of industry markets", "Theory of organization of industry" and others. Of course, over time, scientists will find a more accurate definition of the course, but the use of the name "Industrial Economics" in our country is not acceptable, because. the area of economic theory under consideration has very little in common with it. Therefore, for the time being, the name “Economics of Branch Markets” can be considered the most acceptable.

It is quite difficult to give a clear definition of the economy of industry markets, this is due, according to many authors, to the fact that its boundaries are rather vague. That's why economics of industry markets can be defined as an area of theoretical and applied research, which is associated with the analysis of the economy and the organization of various industrial sectors of the modern economy and the market structures that are formed within them. Such a view is provided by Jean Tirol, who emphasizes the need to focus on the study of the functioning of markets and their various structures. According to this, the economics of branch markets has as its main task the study of the functioning of markets, the interaction of markets and enterprises, and also explores the economic policy of the state associated with the management of markets and market structures. Including policies to support competition and regulate the activities of monopolies, including natural ones, as well as industrial, technological, innovation policies and a number of other aspects of state regulation. At the same time, the economics of industry markets combines aspects of micro- and macroeconomic analysis of market conditions, making it possible to expand the scope of scientific research.

It is also difficult to find an exact definition of the object of the economy of branch markets in the economic literature. This is due to the same reasons why it is rather difficult to define this discipline.

From the name "Economics of Industry Markets" it follows that the area of study of the discipline is: the organization of individual markets and industries, the activities of firms in the industry, the impact of their decisions on the industry organization, the patterns of formation of various market structures, the principles of behavior of firms in various markets, the results of their behavior for the entire economy, options for sectoral policy of the state.

This science is also developing tools for the economic analysis of market structures, deepening the understanding of patterns in this area, and studying the possibility and necessity of state regulation.

In this way, economics of industry markets is a field of economics devoted to the study of markets that cannot be analyzed using standard models of perfect competition.

Basic object of analysis is the study of how productive activity is brought into harmony with the demand for goods and services by means of some organizing mechanism (such as the free market), and how changes and imperfections in the organizing mechanism affect the progress made in satisfying economic needs.

The field of study of the modern theory of the organization of industrial markets covers three groups of issues:

- questions of the theory of the firm: its scale, scope, organization and behavior;

- imperfect competition: exploring the conditions for acquiring market power, the forms of its manifestation, the factors of its preservation and loss, price and non-price rivalry;

– society’s business policy: what should be the optimal business policy (both traditional antimonopoly policy, market regulation, and deregulation, liberalization of conditions for entering the industry, privatization, stimulation of technological and product innovations, competitiveness).

As an independent branch of economic theory, the economics of industrial markets was formed at the beginning of the second half of the 20th century, although interest in the economic behavior of firms and the development of industries arose much earlier.

In the development of the economy of sectoral markets, two main directions can be distinguished:

Empirical (observations of the development and real behavior of firms, generalization of practical experience);

Theoretical (construction of theoretical models of behavior of firms in market conditions).

In the history of development, the following stages can be distinguished.

I stage. The theory of market structures (1880-1910)

In the early 1880s. the works of Jevons came out, which gave impetus to the development of the theoretical direction of the economy of industrial markets and were devoted to the analysis of basic microeconomic models of the market (perfect competition, pure monopoly), the main purpose of which was to explain the effectiveness of the market mechanism and the inefficiency of monopolies. The impetus for the development of research in this direction in the United States was given by the formation of the first federal regulatory bodies and the adoption of antitrust laws. In addition to the work of Jevons, one can also highlight the work of Edgeworth (Edgeworth) and Marshall (Marshall).

The impetus for the development of applied empirical research on industrial markets was given by the works of Clark (Clark), published at the beginning of the 20th century.

However, the studies carried out at this stage were based on too simplified models that do not correspond to reality, especially in terms of the behavior of oligopolistic firms in the market of differentiated products. Strengthening the processes of concentration of production in most sectors of the economy of developed countries and differentiation of products led to the transition to the second stage.

II stage. Market research with product differentiation (1920-1950)

Under the influence of changing business conditions in developed countries in 1920-1930, a new theoretical concept of market analysis appeared. In the 1920s published works by Knight and Sraffa. In the 1930s the work of Hotelling and Chamberlin on modeling markets with differentiated products.

One of the first works devoted to the analysis of oligopolistic markets were published in 1932-33. Chamberlin's Theory of Monopolistic Competition, Robinson's The Economics of Imperfect Competition, and Burle and Means' Modern Corporation and Private Property. These works formed the theoretical basis for the analysis of industry markets.

In 1930-1940. On the basis of the theoretical base formed by these works, empirical research is rapidly developing (Berle and Means, Allen and S. Florence, etc.).

A certain impetus to the development of research was also given by the Great Depression, which necessitated a reassessment of the actual role of competition in the operation of the market mechanism.

III stage. Systematic analysis of industry markets (1950 - present)

Within the framework of this stage, the economy of branch markets is being formed as an independent section of economic theory. In the 1950s E.S. Mason proposed the classic Structure-Behavior-Performance paradigm, later supplemented by Bain. In the mid 1950s. The first textbook on the economics of industrial markets is published.

In the 1960s theoretical studies by Lancaster and Marris appear.

Since the 1970s there is a growing interest in the economy of industry markets, caused by:

1) increased criticism of the effectiveness of state regulation, a move away from direct regulation towards the implementation of antimonopoly policy;

2) the development of international trade and the strengthening of the impact of the market structure on the terms of trade;

3) growing doubts about the adaptive capacity of firms in changing market conditions.

Since the 1970s there is an integration of game theory methods into the methodological apparatus of the economy of branch markets, there are studies devoted to the problems of cooperative agreements, asymmetric information and incomplete contracts.

Modern research in the economics of industry markets can be divided into two main areas that differ in the methodology used:

1) the Harvard school, based on a systematic analysis of industry markets using an empirical basis;

2) the Chicago school, based on a rigorous analysis of dependencies based on the construction of theoretical models.

Any economic system in the course of its activities constantly faces and is forced to answer three fundamental questions:

1. What produce and in what quantities?

2. How produce and at what cost?

3. For whom to produce and how to distribute the products produced?

There are various alternative methods for solving this group of problems. For example, if the organization of the economy is such that all issues are within the competence of the central government, then these three issues can be resolved through central planning. If state intervention is limited to the redistribution of income between different members of society and the implementation of social programs, and the rest of the questions are answered by the market, then with this approach, consumers and producers act in accordance with prices, profits and losses that are generated by the interaction of supply and demand in freely functioning markets. .

The modern market economy is the most complex economic organism, consisting of a huge number of various industrial, commercial, financial and other structures interacting on the basis of a system of business legal norms and united by a single concept - the market. The subject of the theory of branch markets is connected, first of all, with the market approach and consists in the study of the state of branches in industrially developed economic systems. Most core courses consider manufacturing industries as industries due to their size and strategic importance in the economy.

It is possible to define subject theory of industrial markets, given by Coase: the organization of industry is "a description of how economic activity divided among firms. As you know, many firms carry out a lot different types activities, while others have a very limited range of activities. Some firms are large, others are small. Some firms are vertically integrated, others are not. This is the organization of industry or, as it is usually called, the structure of industry.

From the name "Theory of industry markets" it follows that this science deals with the organization of individual industries and markets, studies the activities of firms in the industry, the impact of their decisions on the industry organization, the patterns of formation of various market structures, the principles of behavior of firms in various markets, the results of their behavior for the entire economy, options for sectoral policy of the state. The subject of analysis of the theory of industrial markets is shown in Figure 1.1. Of particular interest is the organization of industry in modern conditions in Russia and other countries.

Figure 1.1. – Subject of analysis “Theory of industrial markets”

To study the theory of industrial markets is to investigate the mechanism that brings production activities into harmony with the demand for goods and services. This organizing mechanism is the free market, and therefore the main object of the course is the study of the functioning of the market. The most important questions to be answered are the following:

How do market processes direct producers to meet consumer demand?

How do market processes bring markets to an equilibrium state?

Why and how can market processes be disrupted?

• how can they be adjusted so that the performance of the economy corresponds to the required representation?

In one way or another, the questions posed are the subject of microeconomics. However, despite the similarities, there is an important difference between microeconomics and industrial economics (the theory of industrial organization), both in purpose and in methodology.

As noted F.M. Scherer(36), both theories explain economic phenomena and consider a type of market organization that links producers with consumers, and this connection is an important variable. However, these theories differ mainly in the number of variables that are taken into account in the study of phenomena and explanation, as well as the applicability of predictions and explanations to specific situations in the real world.

The study of the problems of industrial organization is important for two reasons. Firstly, research in this area has a direct impact on the definition and implementation of public economic policy in areas such as the choice between private and public enterprises, the regulation and deregulation of public infrastructure sectors, maintaining competition through antitrust policy, stimulating technological progress, and much more. Secondly, in relation to many aspects of the functioning of real markets (markets of imperfect competition) in countries with a developed industrial market economy uncertainty remains. Therefore, further research in this direction, of course, is of practical importance.

Industry economics is based on the theory of the firm, the study of which precedes the analysis of industry markets. At the same time, the firm is mostly considered as a separate unit that makes a decision aimed at maximizing profit, i.e. nothing more than a "profit maximizing black box". The relationship between internal organization (managerial control, delegation and execution, etc.) and market strategy is taken as given.

The theoretical foundations of this course are developed and presented mainly in the works of Western scientists. Currently, in Russia there are works devoted to this problem.

In this way, economics of industry markets is a field of economics devoted to the study of markets that cannot be analyzed using standard models of perfect competition.

The field of study of the modern theory of the organization of industrial markets covers three groups of issues:

- questions of the theory of the firm: its scale, scope, organization and behavior;

- imperfect competition: exploring the conditions for acquiring market power, the forms of its manifestation, the factors of its preservation and loss, price and non-price rivalry;

Short course of lectures

Topic 1. Introduction to the theory of industrial markets. The history of development

The theory of industrial markets can be defined as the science of the organization and economic consequences of the functioning of industry markets and the strategic behavior of producers in imperfectly competitive markets.

Under industry market is understood as a set of enterprises that produce products similar in consumer purpose using similar technologies and production resources and compete with each other for the sale of their products on the market.

The main attention in the economics of sectoral markets is given to the study of industries and services. The central place is given to manufacturing industries, due to their scale and strategic importance in the national economy. The main task is to determine the role of market processes in meeting consumer demand by producers, the reasons leading to the violation of market efficiency, and ways to regulate industry markets in order to increase the efficiency of their functioning. In this regard, the economics of sectoral markets serves as a theoretical basis for decision-making within the framework of the sectoral policy of the state.

Many issues considered in the economics of sectoral markets are at the same time the subject of microeconomic theory. At the same time, the approaches used and the goals pursued by these areas of economic theory have significant differences:

1) in the economy of sectoral markets, a systematic approach prevails, based on the analysis of many different relationships, both quantitative and institutional, while microeconomic theory is based on a strict description of the most important simple relationships;

2) the economics of industrial markets has a high practical applicability of the results and a rich empirical base for testing the provisions; microeconomic theory operates exclusively with theoretical models.

The set of practical problems that the economy of industry markets deals with is quite wide, from determining the optimal behavior of a manufacturing company in the market of its products to conducting a systematic industry analysis and developing comprehensive decisions on the implementation of industry policy by government agencies. For example, R. Schmalenzi points out the following as the main questions answered by the economics of industrial markets:

1. What is the market for an individual product in a world of differentiated products, what defines its boundaries?

2. What factors determine the size and structure of firms?

3. What are the key factors that determine the structure of the market?

4. What are the goals of the firm?

5. What pricing policy is typical for firms with market power, and how does it affect public welfare?

6. What opportunities do firms operating in the industry have to prevent new firms from entering the industry or crowding out some existing ones?

7. What factors determine the possibility of collusion between firms and other forms of inter-firm coordination?

8. What damage to public welfare occurs if the firm has market power?

The history of the development of the economy of branch markets

In the development of the economy of sectoral markets, two main directions can be distinguished:

Empirical (observations of the development and real behavior of firms, generalization of practical experience);

Theoretical (construction of theoretical models of behavior of firms in market conditions).

In the history of development, the following stages can be distinguished.

I stage. The theory of market structures (1880-1910)

The impetus for the development of applied empirical research on industrial markets was given by the works of Clark (Clark), published at the beginning of the 20th century.

II stage. Market research with product differentiation (1920-1950)

In 1930-1940. On the basis of the theoretical base formed by these works, empirical research is rapidly developing (Berle and Means, Allen and S. Florence, etc.).

A certain impetus to the development of research was also given by the Great Depression, which necessitated a reassessment of the actual role of competition in the operation of the market mechanism.

III stage. Systematic analysis of industry markets (1950 - present)

In the 1960s theoretical studies by Lancaster and Marris appear.

Since the 1970s there is a growing interest in the economy of industry markets, caused by:

1) increased criticism of the effectiveness of state regulation, a departure from direct regulation to the conduct of antimonopoly policy;

2) the development of international trade and the strengthening of the impact on the terms of trade of the market structure;

3) growing doubts about the adaptive capacity of firms in changing market conditions.

Modern research in the economics of industry markets can be divided into two main areas that differ in the methodology used:

1) the Harvard school, based on a systematic analysis of industry markets on an empirical basis;

2) the Chicago school, based on a rigorous analysis of dependencies based on the construction of theoretical models.

Modern Theory of the Firm

The theory of the firm is one of the richest and most dynamically developing areas of modern economic theory. The modern theory of the firm explores not only the internal and external aspects of the functioning and existence of the firm in various conditions, but also touches upon the institutional issues of economic efficiency.

The best known contemporary researchers in the theory of the firm are Milgrom and Roberts (1988), Hart (1989), Holmstrom and Tyrol (1989).

The main problems considered in the theory of the firm were already raised in the first half of the 20th century (for example, Knight F. (1921), Coase R. (1937)).

The problem of the existence of the firm was raised by Coase, who pointed out that classical economic theory does not provide any reason for the existence of the firm. To justify the existence of the firm, Coase turned to the theory of transaction costs he proposed, the minimization of which was expressed in the intra-company organization. Coase also criticized the classic assertion that the structure of a firm is determined by the technologies used.

In the 1960s In economic research, the problem of the "owner-manager" (Principal-Agent Problem), consisting in the presence of a conflict of interests between the owners of the company and its managers, raised in the studies of Berle and Means (1933), has been widely developed. In the same period, studies appeared concerning the bounded rationality of economic agents, which was considered as one of the reasons for the existence of firms (Simon, March (1958) and later Kuvert, March (1963)).

As an independent section of economic theory, the theory of the firm was formed in the 1970s. (studies by Williamson (1971, 1975), Alchean and Demsitz (1972), Ross (1973), Arrow (1974), Jensen and Meckling (1976) and Nelson and Winter (1982)).

Currently, there are three main directions in the theory of the firm:

1) the neoclassical concept of the firm;

2) contractual (institutional) concept of the firm;

3) the strategic concept of the company.

Alternative goals for the firm

The classic goal of a firm is to maximize the profits generated by the firm. However, in practice, profit maximization is not always the main goal of the firm. Next, we will consider several models that take into account the different goals that firms may pursue.

Baumol model

In the Baumol model, the goal of the firm is to maximize the total revenue from product sales, which leads to a decrease in profit, compared with its maximum level. Obviously, in this case, the sales volume will exceed the sales volume under conditions of profit maximization, which is beneficial, first of all, to the company's managers, since their remuneration is mainly tied to sales volumes. However, the owners of the company may also be interested in maximizing sales proceeds, the reasons for this may be that a reduction in sales in the case of profit maximization can lead to:

Reducing the market share of the company, which may be highly undesirable, especially in the face of growing demand;

Decrease in the market power of the firm, due to an increase in the market share of other firms;

Reduction or loss of distribution channels for products;

Reduce the attractiveness of the firm to investors.

Williamson model

The Williamson model is based on taking into account the interests of managers, manifested in their discretionary behavior in relation to various items of expenditure of the firm (Figure 2.1).

Rice. 2.1 Williamson model

Williamson in his model identifies the following main goals of managers:

1) wage and other monetary rewards;

2) the number of subordinate employees and their qualifications;

3) control over the investment costs of the firm;

4) privileges or elements of managerial slack (company cars, luxurious offices, etc.).

The larger the size of the firm, the more important these goals become for the manager.

Formally, the objective function of the managers in the Williamson model includes the following variables:

S - excess staffing costs, defined as the difference between the maximum profit (P max) and real profit (P A).

M - "management slack", defined as the difference between real profit (P A) and reported profit (P R) (managers can both hide part of the profit and overestimate the reported profit compared to the real one).

I - discretionary investment costs, defined as the difference between the declared profit (P R) and the amount of tax payments (T) and the minimum profit level allowed for shareholders (P min).

The pursuit of these goals is limited by the need to maintain an acceptable level of declared profits (P R). In this case, the task is written as follows:

Thus, in addition to the volume of output (Q), which affects the level of real profit, managers can choose the value:

1) excess staff costs (S);

2) the amount of expenses for the elements of managerial slack (M).

The value of discretionary investment spending (I) is determined uniquely, since the minimum profit and the level of taxes are given.

The solution of the above problem shows that such a firm will have higher staff costs and more managerial slack than a profit maximizing firm. Differences with a profit-maximizing firm also consist in a different response of the firm to changes in external parameters (changes in demand, tax rates, etc.).

Self-managed enterprise model

For employees who own a firm, the goal is to maximize profits per employee. If employees hold a dominant position within the firm (for example, by owning a controlling stake), the firm's policy will also be aimed at maximizing the income received by each employee of the firm.

Let the firm use a two-factor production technology, using labor (L) and capital (K) in production. Let the marginal productivity of labor decrease with the growth of its use. Let the firm also operate in the short run in a perfectly competitive market.

Then the profit per employee of the firm is:

P is the price of the goods,

q is the volume of output,

r is the rental rate for the use of a unit of capital.

Figure 2.2 shows the dependence of the total revenue of the firm (TR) on the number of employees (L). The firm chooses the amount of labor that maximizes profit per worker. Graphically, profit per employee is reflected by the tangent of the line connecting the point on the total revenue curve with the point general expenses for capital.

Rice. 2.2. Choosing the Employment Level in the Self-Managing Firm Model

The firm maximizes profit per employee when this value is equal to the marginal product of labor in monetary terms (see Figure 2.3).

The second maximum condition is provided by the law of diminishing marginal productivity.

Rice. 2.3. Self-managed firm proposal

The behavior of a self-managed firm differs significantly from the behavior of profit-maximizing firms. An increase in the market price from P 1 to P 2, as shown in Figure 2.3, leads to a decrease in the level of employment and a corresponding reduction in output. Thus, the supply curve of a self-managed firm has a negative slope. The presence of a large number of such firms in the market can lead to instability of the market equilibrium.

Model individual entrepreneur

An individual entrepreneur is both the owner of the company and the employee. The goal of the sole trader is to maximize utility by choosing between profit and leisure time (see figure 2.4).

Formally, the model of a rational individual entrepreneur can be written as follows:

The entrepreneur maximizes his utility (U) by choosing the appropriate amount of leisure (L S). Leisure time uniquely determines the time spent by an individual on work, which, in turn, determines the level of profit (P(L S)). With an increase in work time, profit initially grows, however, starting from a certain point, the efficiency of labor efforts begins to fall, and profit, accordingly, begins to decline.

The maximum level of utility is reached at the point of contact between the indifference curve (U 1) and the profit function (point E on the graph).

Perfect Competition

Perfect competition reflects such a form of market organization when all types of rivalry are excluded both between sellers and between buyers. Perfect competition is perfect in the sense that with such an organization of the market, each enterprise will be able to sell as many products as it wants, and the buyer can buy as many products as he likes at the current market price, while neither an individual seller nor individual buyer.

A perfectly competitive market is characterized by the following distinguishing features.

1. Smallness and plurality. There are quite a lot of sellers on the market offering the same product (service) to many buyers. At the same time, the share of each economic entity in the total sales volume is extremely insignificant, therefore, a change in the volume of supply and demand of individual entities does not have any effect on the market price of products.

2. Independence of sellers and buyers. The impossibility of the influence of individual market entities on the market price of products also means the impossibility of concluding any agreements between them on the impact on the market.

3. Product homogeneity. An important condition for perfect competition is the homogeneity of products, which means that all products circulating on the market are exactly the same in the minds of buyers.

4. Freedom of entry and exit. All market entities have complete freedom of entry and exit, which means that there are no barriers to entry and exit. This condition also implies absolute mobility of financial and production resources. In particular, for the labor force, this means that workers can freely migrate between industries and regions, as well as change professions.

5. Perfect market knowledge and full awareness. This condition implies free access of all market participants to information about prices, technologies used, probable profits and other market parameters, as well as full awareness of market events.

6. Absence or equality of transport costs. There are no transport costs or there is an equality of specific transport costs (per unit of production).

The perfectly competitive market model is based on a number of very strong assumptions, the most unrealistic of which is complete knowledge. At the same time, the so-called law of one price is based on this assumption, according to which, in a perfectly competitive market, every commodity is sold at a single market price. The essence of this law is that if any of the sellers raises the price above the market price, then he will instantly lose buyers, since the latter will go to other sellers. Thus, it is assumed that market participants know in advance how prices are distributed among sellers and the transition from one seller to another costs nothing for them.

Perfect Monopoly

A perfect monopoly is a market structure where there is only one seller and many buyers. The monopolist, having market power, carries out monopolistic pricing, based on the criterion of profit maximization. Like perfect competition, perfect monopoly has a number of essential assumptions.

1. Lack of perfect substitutes. A price increase by a monopolist will not lead to the loss of all buyers, since buyers do not have a full-fledged alternative to the products produced by the monopolist. However, the monopolist must take into account the existence of more or less close, albeit imperfect, substitutes for its products produced by other manufacturers. In this regard, the demand curve for the monopolist's products has a falling character.

2.Lack of freedom to enter the market. The market of a perfect monopoly is characterized by the presence of insurmountable barriers to entry, among which are:

- the monopolist has patents for products and technologies used;

– the existence of government licenses, quotas or high duties on the import of goods;

- monopolist control of strategic sources of raw materials or other limited resources;

– significant economies of scale in production;

– high transportation costs, contributing to the formation of isolated local markets (local monopolies);

- carrying out by the monopolist of the policy of preventing new sellers from entering the market.

3. One seller is opposed by a large number of buyers. A perfect monopolist has bargaining power, manifested in the fact that he dictates his terms to many independent buyers, while extracting the maximum profit for himself.

4. Perfect Awareness. The monopolist has complete information about the market for its products.

Depending on the types of barriers that prevent new firms from entering the monopoly market, it is customary to distinguish the following types of monopoly:

1) administrative monopolies due to the existence of significant administrative barriers to entry into the market (for example, state licensing);

2) economic monopolies caused by the monopolist's policy of preventing new sellers from entering the market (for example, predatory pricing, control over strategic resources);

3) natural monopolies, due to the existence of significant economies of scale in relation to the size of the market.

The monopoly structure of the market in conditions of profit maximization by the monopolist leads to limited production volumes and overpricing, which is seen as a loss of social welfare. At the same time, the functioning of a monopoly, as a rule, is associated with the existence of the so-called X-inefficiency, which manifests itself in the excess of real costs for the production of products at the minimum cost level. The reasons for such inefficiency of monopoly production can be, on the one hand, irrational management methods caused by the absence or weakness of incentives to increase production efficiency, on the other hand, incomplete extraction of economies of scale due to incomplete utilization of production capacities, due to limited production volumes while maximizing profits.

At the same time, the existence of a monopoly in a number of cases has its rather significant advantages. For example, due to the implementation of the existing market power, a monopoly has additional own funds that the monopoly can use to develop innovation and investment activities, which could not be available under a different market structure. In the case of significant economies of scale relative to the size of the market, the existence of one large enterprise is more economically justified than the existence of several smaller ones, since one enterprise will be able to produce products at much lower costs than several. The monopolist enterprise is characterized by a more stable position in the market than in any other market structure, while the scale of activity increases its investment attractiveness which makes it possible to attract the financial resources required for development at a lower cost.

Cournot model

Let's start the analysis with the simplest oligopoly model - the Cournot model proposed by the French economist O. Cournot in 1838 using the mineral water market as an example.

This model is based on the following basic assumptions:

1) firms produce homogeneous products;

2) firms know the curve of total market demand;

3) firms make decisions about production volumes independently of each other and simultaneously, assuming that the production volumes of competitors are unchanged and based on the criterion of profit maximization.

Let there be N firms in the market. For simplicity, assume that the firms have the same production technology, which corresponds to the following total cost function:

TC i (q i) = FC + c ∙ q i ,

FC - the amount of fixed costs;

c is the marginal cost.

P(Q) = a – b ∙ Q.

In this case, we can write the profit function for an arbitrary firm i:

Each firm determines the output at which it will receive the maximum possible profit, provided that the output of other firms remains unchanged. Solving the problem of maximizing the profit of firm i, we obtain the function of the best reaction of firm i to the actions of competitors (the Nash response function in terms of game theory):

As a result, we obtain a system of N equations represented by the functions of the best response of firms, and N unknowns, we note that if all firms are the same, as in this case, then the equilibrium will be symmetrical, that is, the equilibrium production volumes for each firm will coincide:

Where the index c indicates equilibrium this indicator according to Cournot.

In this case, the Cournot equilibrium will be characterized by the following indicators:

An analysis of the obtained equilibrium characteristics allows us to draw the following main conclusions:

1. In Cournot equilibrium, higher prices and lower outputs are achieved compared to perfect competition, which leads to a net loss in social welfare.

2. An increase in the number of producers in the Cournot equilibrium leads to a decrease in the market price, an increase in the total volume of production with a decrease in the production volumes of existing firms, and, accordingly, leads to a decrease in their market share and profit. Thus, an increase in the number of firms in this model is beneficial to public welfare, but may be opposed by firms already in the market. An example of such resistance can be the introduction of various certifications and compulsory licensing, the activities of professional or industry associations, as well as various measures of economic opposition to the entry of new firms into the market.

3. With an increase in the number of firms, the equilibrium in the Cournot model tends to a perfectly competitive one and coincides with it for an infinite number of firms.

Let us dwell in some detail on how an increase in the number of firms affects the welfare of society.

Let us estimate consumer surplus (CS) at a given price P:

As the price, we substitute the P c obtained above:

Therefore, as the number of firms increases, consumer welfare increases. Consider now the total welfare (SS):

Again using the expression for the price, we get:

Thus, it is true that social welfare increases with the increase in the number of firms in the industry, but at the same time there is a decrease in the profits of producers.

Let us now consider how the equilibrium characteristics in the Cournot model change if the total costs of firms for the production of products are different:

TC i (q i) = FC i + c i ∙ q i , where

q i is the volume of production of firm i;

FC i is the amount of fixed costs of firm i;

c is the marginal cost of firm i.

In this case, assuming the market demand function unchanged, we get:

As before, solving the profit maximization problem, we obtain the functions of the best response of firms to the actions of competitors:

where q - i are the production volumes of all firms except i.

As a result, we obtain a system of N equations represented by the best response functions of firms and N unknowns, we note that in this case, the equilibrium production volumes of firms will depend on the ratio of marginal costs in the industry. Instead of solving this system to determine the equilibrium output of each firm, we aggregate the resulting best response function of firm i to obtain the total equilibrium output and equilibrium price:

Thus, if firms operating in the market have different production costs, the equilibrium output and price in the Cournot model depend only on the total marginal costs of firms, and not on the ratio of costs between firms, the ratio of costs determines the market share of firms.

Monopoly power of the firm

The introduction of the concept of monopoly power and the corresponding methods for measuring it allows us to analyze the impact on the market of individual entities.

Monopoly power of the firm manifests itself in the ability to set prices at a level exceeding the marginal cost of production (that is, above the competitive level). Indicators of monopoly power are thus based on a comparison of the real market structure with that of a perfectly competitive market.

One of the consequences of the presence of monopoly power in the market is the emergence of the so-called economic profit. The presence of economic profit for a firm over a long period is direct evidence of the existence of its monopoly power and, accordingly, the imperfection of the market. Most indicators of monopoly power are based on the concept of economic profit.

economic profit is defined as the difference between the firm's accounting profit (that is, the actual profit earned) and normal profit. Under normal profit is understood as such a value of profit that gives a level of profitability that is normal for a given industry or economy, respectively, if the analysis is carried out at the industry or macro level.

One of the central concepts used in determining the level of monopoly power is normal profit, the measurement of which is associated with a number of theoretical and practical problems. Determining the value of normal profit is considered in financial analysis.

Normal profit in financial analysis, it is understood as the opportunity cost of the company's equity and represents the maximum return that can be obtained by investing in other projects with the same level of risk.

In financial analysis, the CAPM (Capital Asset Pricing Model) is widely used to determine the value of normal profit.

Definition (CARM).

CAPM shows how much the return on investment exceeds the return on risk-free investments. As a risk-free investment, as a rule, investments in government securities are taken. The excess of investment returns over risk-free returns is risk premium.

According to the CAPM model, the rate of return on investment is:

R x \u003d R f + β x (R m - R f),

where R x is the rate of return security X;

R f is the rate of return on risk-free assets;

β x is the beta coefficient of security x, which shows the risk of investing in security x compared to the risk of the market portfolio;

R m is the average market return.

Market risk premium represents the value of β x ·(R m – R f), reflecting the excess of the return on investment in security x compared to the return on investment in risk-free assets. The higher this value, the more risky are investments in this asset. The degree of investment risk in a particular security x reflects the beta coefficient (β x).

Beta ratio(β x) shows how much the market value of the corresponding security depends on changes in the market situation stock market. Thus, the value of β x less than 1 characterizes the weak influence of market conditions on the value of the security. The value of β x, exceeding 1, reflects a higher risk than the market risk of investing in this security.

For most countries, the required return on equity (R x) corresponds to normal profit. However, some difficulties may arise due to the peculiarities of accounting for the use of borrowed funds in individual countries. For example, in some countries, costs do not include interest on bonds issued by an enterprise and part of the interest payments on bank loans, and therefore, when determining economic profit, interest payments on loans from these sources should be included in it, although from the point of view of economic theory, these payments should be related to costs.

In this case, to determine the normal profit, you should use the weighted average cost of capital (WACC) (Weighted Average Cost of Capital), which takes into account the financing of the company's activities at the expense of borrowed funds:

where

r i is the interest rate for the source of financing of the company i, taking into account the inclusion of part of the interest paid in costs, including the required rate of return on equity;

d i is the share of the source of financing i in the total capital of the firm.

In this case, the normal profit rate depends on:

Profitability of risk-free investments;

Average market risk premium;

The risk of investing in the shares of a particular firm;

Proportions of own and borrowed capital in total capital

Having defined the basic concepts, let's move on to the most common indicators of monopoly power, including:

1) the rate of economic profit (Bain's coefficient);

2) Lerner coefficient;

3) Tobin coefficient (q-Tobin);

4) Papandreou coefficient.

Bain's ratio (rate of economic profit)

The Bain coefficient shows the economic profit per ruble of own invested capital:

Accounting Profit - Normal Profit

K-nt Bein = –––––––––––––––––––––––––––––––––––––––

Firm's equity

Credits

Credit history

Mortgage

For business

Miscellaneous about finance

Contributions, deposits

Finance and more

Getting cards