The structure–conduct–performance (SCP) paradigm, first published by economists Edward Chamberlin and Joan Robinson in 1933, and developed by Joe S. Bain is a model in Industrial Organization Economics which offers a causal theoretical explanation for firm performance through economic conduct on incomplete markets. This model has had direct influence on subsequent Industrial Economics models such as Porter’s five forces analysis.
The structure conduct performance model refers to an analytical framework that explains the connection between economic or market structure, market conduct and its performance. This is a concept or model in Industrial Organization Economics that examines and describes the interaction between organisation structure (environment), organizational conduct (behaviour) and organizational performance (achievement). The structure conduct performance model presents a causal theory explanation of these three concepts. It presents, their strengths, characteristics as well as downsides.
According to the structure–conduct–performance paradigm, the market environment has a direct, short-term impact on the market structure. The market structure then has a direct influence on the firm’s economic conduct, which in turn affects its market performance. Therein, feedback effects occur such that market performance may impact conduct and structure, or conduct may affect the market structure. Additionally, external factors such as legal or political interventions affect the market framework and, by extension, the structure, conduct and performance of the market.
The SCP model or paradigm is a crucial aspect of industrial organization theory. This model was first published in 1933 by two economists Edward Chamberlin and Joan Robinson before it was later developed by Joe S. Bain in 1959. The SCP model examines the interplay between three major components of an industrial organization which are structure, conduct and performance. As developed by Joe S. Bain in 1959, SCP paradigm was considered as a pillar of the industrial organization theory because it serves as an analytical framework for analysing the major elements of market. Market structure and conduct are major determinants of market performance. There are three elements or variables of market that are considered important as they influence market behaviours exhibited by both buyers and sellers. These elements are structure, conduct and performance.
Structure: This refers to the construction, formation and the makeup of an industrial organization. It also describes the kind of environment in which an organization or market operates.
Conduct: This describes the behavior or comportment of buyers and sellers to the structure of a market. It also refers to the way buyers and sellers interact with each other and the way they behave.
Performance: This refers to the achievement or accomplishment or results of a particular market or industry. Performance variables that are considered in the market include product quantity, product quality, and production efficiency.
The SCPP presupposes the existence of a causal relationship from:
(a) Structure to conduct, and from
(b) Conduct to performance.
However, structure, conduct and performance each possesses various attributes so that the chain of causation is not clearly in the same direction.
(i) Aggregate Concentration:
Aggregate concentration refers “to the degree of control over economic activity exercised by the largest firms in the economy”.
This definition implies at least two things:
(a) Increasing control of the economy by large firms.
(b) A corresponding reduction in the role of the individual entrepreneur.
Aggregate concentration is likely to affect pricing decisions in two ways:
(1) Prima facie, to the extent that there is harmony of interests among a few large firms, none of them will seek any price change that is likely to be injurious to others.
(2) Secondly, changes in aggregate concentration may lead to changes in market concentration that affect the firm’s pricing decision. It is to the concept of market concentration that we turn now.
However, one final point may be noted before we proceed further; the relationship between pure size and pricing behaviour is tenuous at best.
(ii) Market (Industry) Concentration:
Market concentration refers to the degree of concentration within an industry rather than in the aggregate economic system. It provides a summary measure of the degree of monopoly power in an industry and, in this sense, enables us to measure the degree of imperfection in a market. It is well known that in most markets we have situations which lie between the two extremes of perfect competition and monopoly.
In perfect competition, an individual firm cannot affect the market pricing by unilateral action. Thus, the degree of price discretion available to a firm is zero, A monopolist, on the other hand, possesses complete control on the pricing decision.
But in the in-between cases, how do we measure the degree of imperfection of the market, i.e., the degree of price discretion available to a firm? Market concentration provides an answer to this question.
One type of measure of market concentration is obtained by calculating the percentage of the industry’s size accounted for by the largest few firms. In effect, this amounts to doing for particular industries what Prof. R. K. Hazari did for the private corporate sector in India as a whole.
In general, the size of a firm may be measured by the volume of its output or sales, the number of people employed in the firm, its share capital, its assets etc. However, this type of measure of market concentration suffers from the defect that it only provides us with a rough and ready measure of the degree of monopoly power.