What is Structure-Conduct-Performance Framework
To determine whether a business conduct contravenes antitrust laws, it is necessary to make a competition analysis. The analytical framework that is commonly used in competition analysis is the Structure-Conduct-Performance Framework (SCP). The SCP approach assumes that there is a stable, causal relationship between the structure of an industry, firm conduct and market performance.[i] Simply put, the SCP framework states that market performance depends on the conduct of firms whereby said conduct is determined by the market structure. The SCP is an old but still classic framework that is used in competition analysis.
Factors to Consider in Structure-Conduct-Performance Framework
In looking at the market structure, the factors affecting demand and supply are assessed. Hence, market concentration, barriers and conditions to entry and degree of differentiation must be considered.
Anent market concentration, a straightforward count of the firms in a market is a basic measure of concentration.[i] Concentration can be measured using such data as sales revenue, production, volume, capacity or reserves.[ii]
With regard to barriers to entry, if these barriers are low, then the market may be considered competitive and vice-versa. Barriers to entry may be in the form of the incumbent’s structural advantage (technology, equipment), economies of scale and position of the incumbent in the market.
Going to the degree of differentiation, closeness of substitution, variable profit margins and price sensitivity of customers are taken into consideration.[iii]
As for conduct, the SCP framework looks at how firms make decisions and policies in relation to price, advertising, quality of products, range of products, research and development and legal strategies. As this is hard to assess, conduct is determined or shaped by market structure.
Finally, performance is considered as a result of conduct. THE SCP framework looks at how the market is functioning. SCP studies typically measure market performance by using any of the three profitability variables namely economic profits or rates of return on investment, Lerner Index or Price-cost margin and Tobin’s q.[iv]
Effectiveness of Structure-Conduct-Performance Framework
The primary strength of the SCP framework is its simplicity since it allows one to assess economic issues in competition cases through a linear approach. It is quite straightforward to assume the causality among structure, conduct and performance. It provides for an easy approximation.
Furthermore, the SCP framework is a rational way of looking at competition issues and dispenses with some uncertainties by taking conditions as static or given. Assumptions made on certain structural variables saves on time and effort.
Weaknesses of Structure-Conduct-Performance Framework
However, its very strength can be the reason for its weakness. Since the SCP framework regards the conditions or variables as static, it does not accommodate dynamic efficiency or innovations and improvements in the market. In a modern world such as ours, it has been proven that technology has played a large role in the market and has substantially affected demand and supply.
The SCP framework has also been criticized for depending on profitability to assess market power. It is highly possible that a highly profitable firm may not possess market power and vice-versa.
Finally, one criticism of the SCP framework is its single directional linear approach whereby the causal effect of structure to conduct to performance does not permit an opposite direction causal effect. For example, companies may engage in a certain conduct which can in turn determine market structure and lower price elasticities.
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[iv] Culled and summarized from J Church and R Ware, Industrial Organization: A Strategic Approach (Irwin McGraw-Hill, 2000) 426-428.
[i] J Church and R Ware, Industrial Organization: A Strategic Approach (Irwin McGraw-Hill, 2000) 425.