SOLUTION AT My Australian Academy
The purpose of an industry analysis with an international trade focus is to assess theperformance and import/export behaviors of the industry.The steps in an industry analysis are:â€¢ Identify the industry and describe its market.â€¢ Classify the market structure of the industry.â€¢ Analyze the import/export status of the industry.â€¢ Evaluate the future performance of the industry.A. Introduction to the Industry and its MarketA. 1. Industry Definition and DescriptionThe first task is to define the industry. An industry analysis often starts with a briefintroduction to the industry.A. 2. Market ConditionsGeneral market conditions faced by an industry are often important factors in the choice ofconduct by firms and for the ability of firms to generate profits and meet expectedperformance goals. Identifying relevant general market conditions requires an analysis of:â€¢ Supply and demand conditions that define the market.â€¢ The overall market environment. Environmental factors are often identified with a PESTmethodology. The PEST acronym stands for Political/Legal, Economic, Sociocultural, andTechnological factors.B. Market StructureTable 1: Classifications of Market StructureCriteria Market StructurePerfectCompetitionMonopolisticCompetition Oligopoly MonopolyNumber of Sellers Many Many Few OneProductCharacteristics Homogenous Differentiated Homogeneousor Differentiated UniqueBarriers to Entry None None High Very HighB. 1. Market Definition and the Relevant MarketB. 2. Number of SellersHow many sellers are there? This question can be answered in two ways. First, we canliterally count the number of sellers. Second, we can measure the concentration of theindustry.International Trade2B. 2. a. Concentration MeasuresMarket concentration measures are used to classify how competitive an industry is.Concentration measures help us to understand how much market share is concentrated inthe hands of a small number of firms. An industry characterized by low concentration willhave a large number of firms with small market shares. An industry characterized by highconcentration will have a small number of firms with relatively high market shares.Industries with high concentrations are more likely to have market power, i.e. the ability toset price.Two commonly used concentration measures are the concentration ratio and theHerfindahl-Hirschman Index.B. 2. b. Classifying IndustriesIt is important to classify industries as to market structure because the greater the number ofsellers, the more likely the industry is competitive.Classifying Industries with the CR4Table 2: Classifying Industries with the CR4CR4 Interpretation of Market StructureCR4 = 0 Perfect Competition0 < CR4 < 40 Effective Competition or Monopolistic Competition40 <= CR4 < 60 Loose Oligopoly or Monopolistic Competition60 <= CR4 Tight Oligopoly or Dominant Firm with a Competitive Fringe90 <= CR1 Effective Monopoly (near monopoly) or Dominant Firm with aCompetitive FringeClassifying Industries with the HHI and The Antitrust Division of the Department ofJustice (DOJ)Table 3: Classifying Industries with the HHIHHI Interpretation of Market StructureHHI < 1000 Effective Competition or Monopolistic Competition1000 < HHI < 1800 Monopolistic Competition or Oligopoly1800 < HHI Oligopoly, Dominant Firm with a Competitive Fringe, or MonopolyB. 3. Product CharacteristicsAn important criterion for classifying market structure is whether the product ishomogeneous, differentiated, or unique.Sources for identifying product characteristics are company provided information (webpages and information packages); company advertising and promotional materials, corporatereports of publicly held corporations, periodical articles and news, and trade associations.International Trade3B. 4. Barriers to Entry (BTE)The final criterion for classifying market structure is the level of barriers to entry in the longrun. There are three types of barriers to entry:â€¢ Natural Barriers (economies of scale, economies of scope, absolute cost advantages,capital costs, etc.)â€¢ Strategic Barriers (actions taken by firms such as product differentiation and increasing thecost of entry)â€¢ Legal Barriers (patents, licenses, laws and regulations, etc.)B. 5. Identifying Market StructureGiven answers to the number of sellers, product characteristics, and barriers to entry, aresearcher can identify the market structure of an industry using Table 1.C. Import/Export BehaviorsC. 1. Import/Export StatusIllustrate the international trade status of the industry.
the importance of trade in the industry.C. 2. Inter-industry trade/Intra-industry tradeDefine whether the trade belongs to inter-industry trade and/or intra-industry trade.C. 3. Cause of tradeFrom no trade model assumptions, determine the cause of the trade in the industry.C. 4. Potential Trade PerformanceD. Evaluating the Performance of an IndustryIndustry performance is measured by its success in creating value for consumers.An evaluation of industry performance depends upon whether performance is being judgedby return to an investor or value-created for a consumer. In general, high returns to aninvestor are the result of the extraction of value from the consumer. In other words, thefirms in the industry have market power and can charge a price higher than marginal costand earn economic profits (profits in excess of a normal return). Firms in the industry arebetter off as they earn higher profits, consumers are worse off because they buy less inquantity and pay more in price.D.1. Value-CreationValue-creation can be based upon superior differentiation or superior cost.Superior differentiation may be evidenced byInternational Trade4â€¢ High product quality and/or serviceâ€¢ Rapid technological advanceSuperior cost may be evidenced by price competition in the industry thatâ€¢ Arises from entry of firms with lower cost structures into the industryâ€¢ Results in exit of firms with higher cost structures from the industryD.2. Market PowerMarket power depends on market structure. In general, market power increases as marketconcentration increases. Thus, industry performance measures generally increase as marketconcentration increases.D.3. Social WelfareThe total benefit to society (social welfare) of the production of a good or service considersboth the profits of the industry and the value created for consumers. Thus, a researcherevaluating the performance of an industry must take care to consider both members ofsociety. An industry’s total contribution to society’s welfare is more than its own profits;measuring industry performance should also include the benefits created for consumers.E. Summary