Session: How do economists traditionally think about structure within industries

Question

Session: How do economists traditionally think about structure within industries?

The basic model of industry structure in Microeconoimcs (aka Price Theory) assumes identical

firms who enter the industry to minimize average costs. These firms face initially declining

average costs (as fixed costs are spread over an increasing number of units of output) then rising

average costs (as assumed rising marginal costs outweigh the advantages of further spreading of

fixed costs).

please use citations and references to answer it. answer should be 75-100 words,

Explanation / Answer

In traditional theory of structure in an industry economist consider all firms to be alike in all economic dimensions like, production, costs, products, pricing except for their size. According to this theory market power is shared among firms in industry. According to ‘Bain’ & others this market power is due to presence of barriers to entry for new firms which creates mutual dependence among firms. They consider market power is divided in proportion to their sales. In this theory economists think the market structure (number of sellers, degree of product differentiation, cost structures) 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). Walras( 8174-77) thinks that market price of a good increases if there is a positive excess demand, while it decreases if there is positive excess supply.

The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation. The production function of any firm is dependent on the quantity of inputs a firm uses & the quantity of output it produces. These firms initially face declining average costs (as fixed costs are spread over an increasing number of units of output) then rising average costs (as assumed rising marginal costs outweigh the advantages of further spreading of fixed costs).According to theory of the limit price it assumes that established firms fix a price at the level of the costs that new entrants have to bear if they choose to enter.

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