Summary
Summary chapter 7-nature of industry
- Course
- Managerial Economics
- Institution
- Azad University
Summary Managerial Economics & Business Strategy, ISBN: 0619 Managerial Economics-chapter 7
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
Chapter 7: The Nature of IndustryFirms need to make decisions regarding their pricing policies and thus they need to know the
optimal price. Nevertheless, it is the nature of the industry where the firm is operating that makes
the pricing strategy of different firms differ.
Market Structure – Factors that affect managerial decisions, including the number of firms
competing in a market, the relative size of the firms, technological and cost considerations,
demand conditions and the ease with which firms can enter or exit the industry
The following are the factors that affect pricing decision:
Firm size
Firm size affects how managers run the company and decide on the pricing strategy. Different
industries give rise to different size of firms
Industry concentration
This is about whether the industry has many small firms or few large firms.
Concentration ratios- Measures how much of the total output in an industry is produced by the
largest firms in the industry
The four-firm concentration ratio- The fraction of total industry sales (St) generated by the four
largest firms (S1 to S4) in the industry.
C4 = (S1 + S2 + S3+ S4)/ St or C4 = (W1 + W2 + W3+ W4) where Wn= Sn/St
The closer the C4 is to 1 the higher the concentration of the industry
Herfindahl-Hirschman index (HHI) – The sum of the squared market shares of firms in a given
industry multiplied by 10,000.
HHI = 10,000∑wi2
, The closer the HHI value to 10,000 means fewer firms exist in the industry
Limitation of concentration measures:
Global market – imports are often excluded from the analysis although it may constitute a large
proportion of the industry.
Different markets - many relevant markets for industries are very local. Thus, even though in the
national level the concentration may be low, that might not be the case in the regional or local
market.
Industry definitions and product classes - depending on the definition of the industry, the
concentration may differ. Hence, the more specific the market is the more concentrated the
industry is.
Technology
Technology is the one that makes industries differ from one another. Some industries need a lot
of capital investment while others are more labor intensive. In the more technological-intensive
industries, when one firm possesses a more efficient capital then the manager can really put the
cost down and charge a lower price.
Demand and Market Conditions
In the market where demand is relatively low, managers need to adjust the product price to
compete in the market.
In the market where there is an ease of information flow, the consumers can compare price easily
and thus managers need to actually take note of their competitors.
Elasticity of demand also varies across industries. In the market with many close substitutes, the
price will generally be lower than those markets that have few substitutes.
Rothschild index – A measure of the sensitivity to price of a product group as a whole relative to
the sensitivity of the quantity demanded of a single firm to a change in its price.
Rothschild index equation:
R = Et / Ef
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller alikarimi. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for CA$9.48. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72349 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now