The study of competition in an industry usually rests upon an analysis of market structure, conduct, and performance. Structure refers to the external environment within which the firm's decisions are made. How a firm's policies, especially price policies, are determined is the measure of market conduct, and market performance describes the end results of market processes. Performance involves an assessment of the extent to which the economic results of an industry's market behavior deviate from the optimum contribution it could make to achieving the accepted goals of society. Knowledge of the impact of market structure and conduct on market performance provides a basis for evaluating public policy designed to promote competition. Antitrust laws, regulatory commissions, and legislation affecting competition indirectly influence market performance by changing either the structure of markets or the conduct of sellers in those markets.

Public Policy and Industrial Structure

Many modern econometric studies of industrial organization have been concerned with the various relationships between market structure and market performance. This emphasis reflects the importance of public policy questions in industrial organization. Government policies seldom focus directly on performance, but rather are applied to structural or behavioral features of markets. As a result, the structure-performance relationship spurs considerable research that attempts to serve the needs of policy makers.

The structure-performance relationship remains obscure without a generally accepted theory of oligopoly. Various models of oligopolistic behavior exist, but they fall short of explaining actual behavior. Researchers are forced to take a more inductive approach, attempting to link certain structural variables with aspects of market performance.

The greatest amounts of research have been devoted to establishing the relationship between levels of seller concentration in an industry and allocative efficiency measured by long-run profitability. Lesser amounts of research have been devoted to the relationship between entry conditions and efficiency. It is possible to generate oligopoly theories that lead to almost any prediction, but most researchers have hypothesized that the probability of successful collusion among sellers increases as the level of seller concentration rises in an industry. As a result, high concentration is predicted to be associated with high, long-run profit rates. In an opposite manner, low concentration