Industry Analysis

The purpose of an industry analysis with an international trade focus is to assess the
performance and import/export behaviors of the industry.
The steps in an industry analysis are:
• Identify the industry and describe its market.
• Classify the market structure of the industry.
• Analyze the import/export status of the industry.
• Evaluate the future performance of the industry.
A. Introduction to the Industry and its Market
A. 1. Industry Definition and Description
The first task is to define the industry. An industry analysis often starts with a brief
introduction to the industry.
A. 2. Market Conditions
General market conditions faced by an industry are often important factors in the choice of
conduct by firms and for the ability of firms to generate profits and meet expected
performance goals. Identifying relevant general market conditions requires an analysis of:
• Supply and demand conditions that define the market.
• The overall market environment. Environmental factors are often identified with a PEST
methodology. The PEST acronym stands for Political/Legal, Economic, Sociocultural, and
Technological factors.
B. Market Structure
Table 1: Classifications of Market Structure
Criteria Market Structure
Perfect
Competition
Monopolistic
Competition Oligopoly Monopoly
Number of Sellers Many Many Few One
Product
Characteristics Homogenous Differentiated Homogeneous
or Differentiated Unique
Barriers to Entry None None High Very High
B. 1. Market Definition and the Relevant Market
B. 2. Number of Sellers
How many sellers are there? This question can be answered in two ways. First, we can
literally count the number of sellers. Second, we can measure the concentration of the
industry.
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B. 2. a. Concentration Measures
Market concentration measures are used to classify how competitive an industry is.
Concentration measures help us to understand how much market share is concentrated in
the hands of a small number of firms. An industry characterized by low concentration will
have a large number of firms with small market shares. An industry characterized by high
concentration 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 to
set price.
Two commonly used concentration measures are the concentration ratio and the
Herfindahl-Hirschman Index.
B. 2. b. Classifying Industries
It is important to classify industries as to market structure because the greater the number of
sellers, the more likely the industry is competitive.
Classifying Industries with the CR4
Table 2: Classifying Industries with the CR4
CR4 Interpretation of Market Structure
CR4 = 0 Perfect Competition
0 < CR4 < 40 Effective Competition or Monopolistic Competition
40 <= CR4 < 60 Loose Oligopoly or Monopolistic Competition
60 <= CR4 Tight Oligopoly or Dominant Firm with a Competitive Fringe
90 <= CR1 Effective Monopoly (near monopoly) or Dominant Firm with a
Competitive Fringe
Classifying Industries with the HHI and The Antitrust Division of the Department of
Justice (DOJ)
Table 3: Classifying Industries with the HHI
HHI Interpretation of Market Structure
HHI < 1000 Effective Competition or Monopolistic Competition
1000 < HHI < 1800 Monopolistic Competition or Oligopoly
1800 < HHI Oligopoly, Dominant Firm with a Competitive Fringe, or Monopoly
B. 3. Product Characteristics
An important criterion for classifying market structure is whether the product is
homogeneous, differentiated, or unique.
Sources for identifying product characteristics are company provided information (web
pages and information packages); company advertising and promotional materials, corporate
reports of publicly held corporations, periodical articles and news, and trade associations.
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B. 4. Barriers to Entry (BTE)
The final criterion for classifying market structure is the level of barriers to entry in the long
run. There are three types of barriers to entry:
• Natural Barriers (economies of scale, economies of scope, absolute cost advantages,
capital costs, etc.)
• Strategic Barriers (actions taken by firms such as product differentiation and increasing the
cost of entry)
• Legal Barriers (patents, licenses, laws and regulations, etc.)
B. 5. Identifying Market Structure
Given answers to the number of sellers, product characteristics, and barriers to entry, a
researcher can identify the market structure of an industry using Table 1.
C. Import/Export Behaviors
C. 1. Import/Export Status
Illustrate the international trade status of the industry.

  1. trade direction
  2. trade volume
  3. the importance of trade in the industry.
    C. 2. Inter-industry trade/Intra-industry trade
    Define whether the trade belongs to inter-industry trade and/or intra-industry trade.
    C. 3. Cause of trade
    From no trade model assumptions, determine the cause of the trade in the industry.
    C. 4. Potential Trade Performance
    D. Evaluating the Performance of an Industry
    Industry performance is measured by its success in creating value for consumers.
    An evaluation of industry performance depends upon whether performance is being judged
    by return to an investor or value-created for a consumer. In general, high returns to an
    investor are the result of the extraction of value from the consumer. In other words, the
    firms in the industry have market power and can charge a price higher than marginal cost
    and earn economic profits (profits in excess of a normal return). Firms in the industry are
    better off as they earn higher profits, consumers are worse off because they buy less in
    quantity and pay more in price.
    D.1. Value-Creation
    Value-creation can be based upon superior differentiation or superior cost.
    Superior differentiation may be evidenced by
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    • High product quality and/or service
    • Rapid technological advance
    Superior cost may be evidenced by price competition in the industry that
    • Arises from entry of firms with lower cost structures into the industry
    • Results in exit of firms with higher cost structures from the industry
    D.2. Market Power
    Market power depends on market structure. In general, market power increases as market
    concentration increases. Thus, industry performance measures generally increase as market
    concentration increases.
    D.3. Social Welfare
    The total benefit to society (social welfare) of the production of a good or service considers
    both the profits of the industry and the value created for consumers. Thus, a researcher
    evaluating the performance of an industry must take care to consider both members of
    society. 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

Sample Solution

ACED ESSAYS