• Structure, conduct, performance

    I’m reminded how much I rely on the internet when I fail to find a concise, free, and easily accessible definition or explanation of a concept. For example, I recall being frustrated in not finding a satisfactory explanation of the structure, conduct, performance (SCP) paradigm of the economics sub-field of industrial organization (IO). This post fills this apparent void in the internet.

    Here’s Rex Santerre and Stephen Neun in the eighth chapter of their book Health Economics: Theories, Insights, and Industries Studies:

    [The figure below] illustrates the major elements that constitute the SCP paradigm. […] [M]arket structure establishes the overall environment or playing field within which each firm operates. Essential market structure characteristics include the number and size distribution of the sellers and buyers, the type of product offered for sale, barriers to entry, and whether any asymmetry of information exists between buyers and sellers. […] [M]arket structure often differs across industries because of variations in basic conditions, including the underlying technological base, the legal environment, demand conditions, and economies of scale. All of these basic conditions tend to affect the number and size distribution of firms observed in an industry.

    Market conduct, the second element, shows up in pricing, promotion, and research and development activities. Whether a firm decides its policies independently or in conjunction with other firms in the market has a crucial impact on the conduct of the industry. The third element, market performance, feeds off conduct and is reflected in the degree of production and allocative efficiencies, equity, and technological progress.

    In the stratosphere of applied IO technique, the SCP paradigm has fallen out of favor as a template for a market model. More complex structural models are now the norm in the leading IO and economics journals. Those models are not without criticism too (see Angrist’s and Pischke’s take on the “new empirical IO”). However, if careful attention is paid to the potential endogeneity of  structure with respect to conduct (or performance), sound conclusions can still be drawn using an SCP framework. (Well, I think so anyway.)

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