| What does the S-C-P Diagram stand for? | Structure-Conduct-Performance (SCP) paradigm |
| What is the SCP diagram used for, and what is it specially useful for? | SCP is widely used to study the conduct and performance of firms and industries. SCP breaks down complex industry-level data into structure-conduct-performance. Neoclassical theory of the firm which assumes direct links between market structure, firm conduct (i.e., behavior) and performance is main theory behind the SCP diagram.
It is especially useful for policy analysis. |
| What does the "Structure" part cover in the S-C-P diagram? | Structure: Here we look for the structure in the market (Number of firms + size of firms, size of the market, barriers of entry, competition, economies of scale etc.) Most important to define industry properly. |
| What does the "Conduct" part cover in the S-C-P diagram? | Conduct: Here we look for how the market behave, price settings, aggregate quantity, collusion, strategic positions not relating to quantity (for instance market mergers) |
| What does the "performance" part cover in the S-C-P diagram? | Performance: Here we look for what kind of performance the market makes. Profits, production efficiency (technology available) growth of firms over time. |
| What does S-C-P Diagram assume about the market? | SCP assumes structural characteristics of markets change slowly, and can be considered as fixed in the short-run |
| How is Structure, conduct and performance connected? | The structure of a market influences the conduct of the firms operating in the market, which in turn influences the performance of these firms.
The performance of the firm, in turn, potentially influences market structure |
| What role does SCP diagram have in government policy? | Government policy can shape structure, conduct and performance variables. There is a role for government or regulatory intervention to promote competition and prevent abuse of market power, if there is high seller concentration in the market
• Promote competition by preventing horizontal mergers or breaking up
larger firms – structure
• Impose price controls, legal restrictions on unlawful or acceptable forms
of collusions – conduct
• Adjust economic, environmental and social policies – performance |
| According to SCP diagram, is government intervention in a market a good idea? | There are two schools of thought:
1. Neoclassical theory and SCP paradigm --> Intervene, to create as much
economic welfare as possible.
2. Chicago school: markets have natural tendency to revert to competition
do not intervene |
| What are some limitations of the S-C-P diagram? | • Does not precisely specify the relationship between structure, conduct, and performance variables
• In practice, often difficult to decide which variables belong to structure, conduct or performance
• In practice, often difficult to define the relevant market or industry for analysis
• Most variables are difficult to measure empirically – entry barriers, product differentiation, collusion
• In practice, hard to tell collusion and economies of scale apart: a positive association between concentration and profitability could arise
- through collusion OR
- through cost savings achieved large firms (economies of scale) |
| What is the collusion hypothesis? | Collusion hypothesis argues that profits arise from corporation with competitors. For instance, high tech firms agree not to hire each other’s employees, keeping labor costs down. |
| What is the efficiency hypothesis | The efficiency hypothesis argues that profits arise from efficiency. |
| Is it possible in practice to tell if profits arose from either collusion or efficiency? | When analyzing at industry level, it is not possible to tell the two apart as the overall result is higher profits. Difficult to prove causality. |
