SCP Paradigm - Exercise

Outline the basic economics of the S-C-P model, which underpins the difference between the Chicago and Harvard schools of thought?

The SCP framework, which is embodied in classical antitrust analysis, represents a leading paradigm in antitrust theory. This does not mean that it is the only paradigm with a following or with an applicability to antitrust analysis. A newer approach is the contestable markets approach that emphasises competitive behaviour and performance under conditions of free entry and exit into industries, particularly in the absence of sunk costs.

We can begin from the perspective of structural parameters, which evolve from a strict interpretation of a Neo-classical economic model. There are incumbents (if one incumbent, a monopolist) and entrants (potential and de novo) and there are barriers to entry.

The SCP framework can be best illustrated by Figure 6. The monopolist produces at output level , with a measure of profit equal to the rectangle (PABC). There is no incentive for the monopolist to reduce price, unless consumers switch to a substitute product or there is a threat of entry.

Figure 1

The threat of entry will force the monopolist to reduce price in order to deter entry. The contestable markets approach also emphasises competitive behaviour and performance under conditions of free entry and exit into industries, particularly the absence of sunk costs.

The effect of time on a business becomes an important parameter. The significance of time in business goes beyond the reality that markets and companies are moving faster. There is a more interesting force at work. Business time as a continuum is not only speeding up -business time is splitting markets apart, as well as the companies that compete in them. Time should be recognised, for example, in the definition of public utility markets like electricity markets or e-communications.