Important structural variables in structure conduct performance (SSP) Structural characteristics often change slowly and can be regarded as fixed over time. Government policies can alter industry structure. We can identify the following as some of the more important structural variables. Concentration This refers to the amount of market power held in the hands of a few firms and is normally measured by the share of total industry sales, assets or employment controlled by the largest firms in the industry. Ђ Product differentiation This refers to the nature of the product. To what extent is the product identical to hose produced by other firms; to what extent is it unique? If there is no product differentiation, firms produce identical products and a market structure such as perfect competition prevails. Any change in the nature of the product whether real or imagined will alter the elasticity of demand for an individual firm’s product.
This, in turn, will have implications for revenue and profitability of the established firms. Essentially, the larger the firm, the more likely it will be able to benefit from economies of scale and scope, which ultimately feed through to lower costs and higher profits. However, firm size may also grant an individual firm market power, which can be used to charge customers high prices, ultimately leading to higher profits. Overall, we would normally expect a positive relationship between firm size and profitability.
However, it is by no meaner clear whether the relationship is a consequence of lower costs or of large firms exercising market power by charging consumers higher prices. Entry and exit conditions Entry and exit conditions determine the ease with which new firms can enter or existing firms can leave the industry. If entry is difficult, established firms are haltered from outside competition and are likely to be able to raise prices to make abnormal profits, even in the long run.
Vertical integration and diversification Vertical integration describes the extent to which firms are involved in one or more stages of the production process. For example, a firm may not only manufacture a product, but also be involved in the retailing and distribution of that product. Alternatively, a firm may source its own raw material inputs to supply its manufacturing division. Consequently, vertically integrated firms have greater certainty in obtaining supplies of raw materials and are more likely to have remunerated distribution outlets for their manufactured products.
Diversification describes the extent to which the firm produces a range of products across geographic or product space. In other words, a tall may produce and sell a similar product across different regions or countries or numerous products across the same geographic market. Diversified firms are less exposed to risk than their non- diversified counterparts. This is because any losses incurred in one market can be recouped by profits made in another.