Structure-Conduct-Performance

Economists’ concern with the private exercise of market power goes back at least to Adam Smith, who wrote:

People of the same trade seldom meet together. Even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Economists who shared this concern developed what has come to be known as the structure-conduct-performance framework of industrial analysis. The simplest version of this framework is illustrated in Figure 1-1. In this basic view, market structure determines the behavior of the firms in the market, and the behavior of firms determines the various aspects of market performance. There is a sense in which the study of industrial economics amounts to fleshing out the relationship outlined in Figure 1-1.

Structure

You will perhaps recall that the economist’s model of perfect competition assumes many small buyers and sellers, dealing in a standardized product, under conditions of free and easy entry and complete and perfect knowledge. The major elements of market structure describe ways in which markets depart from the conditions that describe perfect competition.

Number and Size Distribution of Sellers

A classroom competitive market consists of many small buyers and sellers, no one of who is able to influence the price. From a social point of view, a competitive industry is efficient under conditions and in a sense that will be made precise in Chapter 2.