Structure, Conduct and Performance paradigm (SCP) is used as an analytical framework, to make relations amongst market structure, market conduct and market performance. It was developed in 1959 by Joe S. Bain Jr., who described it in his book “Industrial Organization”. The SCP paradigm is considered a pillar of industrial organization theory, and it has been since its conception a starting point when analysing markets and industries, not only in Economics, but also in the fields of business management and controlling. For instance, the mainline of Michael E. Porter’s works on competition are based on premises derived from this paradigm.
Following its reasoning, an industry performance (which could be considered as the potential benefits to consumers and society as a whole) are determined by the conduct of the firms within the boundaries of this industry, which in turn depend on the structure of the market.
Elements of the Paradigm
- Structure: those set of variables that are relatively stable over time and affect the behaviour of sellers and/or buyers. The way in which markets fail to follow perfect competition conditions, depends basically in the degree of: supply concentration, demand concentration, product differentiation and market entrance barriers. Also, the structure of the market will always be determined by the nature of the product and the technology available.
– Conduct: the way in which buyers and sellers behave, both amongst themselves, and amongst each other. Firms choose their own strategic behaviour, investment in research, in development, advertising levels, collusions, etc.
– Performance: It is measured by comparing the results of firms along the industry in efficiency terms, and different ratios are used to assess different profitability levels. The variables considered at this level are such as pricem quantity, product quality, resource allocation, production efficiency, etc.
The dynamic behaviour of buyers and sellers have an effect on the markets, making it harder to predict and establish fixed market structures. Difficulties arise when trying to explain the paradigm and this is due to data shortage, and the multiple definitions and extension of markets. Actually, the main problem when using this methodology to analyse a market or an industry is the difficulty of defining the limits or boundaries of a given industry.
As implications of all this, regarding economic policies, Harvard school recognizes market power as being dangerous, and establishes a relation between, the concentration ratio, and the harmful effects on social welfare.