Visiting an old battleground in empirical industrial organization: SCP versus NEIO

Abstract

There are two principal approaches to analysing market power – the new empirical industrial organization (NEIO) approach and the structure–conduct–performance (SCP) approach. The existing literature on market power shows that there is no unanimous agreement on which of these two methods should be used to analyse the market power. Users seem to select whichever method is best suitable to their situation, such as data availability. Here we compare these two methods of analysing market power using a single US brewing industry data set and hypothesize that both the methods would yield identical results. On the basis of the empirical results, we conclude that the debate over the use of the SCP approach versus the use of the NEIO approach to analyse market power will continue.

Keywords:

• empirical IO
• SCP versus NEIO
• market power
• brewing industry

JEL Classification:

• L13
• D43

Notes

¹ We can see how differing levels of the conjectural variation parameter, , can affect market power, and as a result, price. In a competitive behaviour setting, , and this implies . Cournot behaviour implies that and , and cartel behaviour implies that and , where N is the number of firms in the market. Also note that if , and if , then .