Industrial organization

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Industrial organization is a field of economics that studies the strategic behavior of firms, the structure of markets and their interactions. The study of industrial organization adds to the perfectly competitive model real-world frictions such as limited information, transaction cost, cost of adjusting prices, government actions, and barriers to entry by new firms into a market. It then considers how firms are organized and how they compete.^[1] Perhaps a most appropriate term is the "Economics of Imperfect Competition". The development of industrial organization as a separate field owed much to Edward Chamberlin, Edward S. Mason and Joe S. Bain.

There are two major approaches to the study of industrial organization: the first approach is primarily descriptive and provides an overview of industrial organization. The second, price theory, uses microeconomic models to explain firm behavior and market structure.^[2]

Structure, conduct, performance

According to the structure-conduct-performance approach, an industry's performance (the success of an industry in producing benefits for the consumer) depends on the conduct of its firms, which then depends on the structure (factors that determine the competitiveness of the market). The structure of the industry then depends on basic conditions, such as technology and demand for a product.^[3] For example: in an industry with technology that the average cost of production falls as output increases, the industry tends to have one firm, or possibly a small number of firms.

Components that make up the structure, conduct, and performance model for industrial organization.

• Basic Conditions: Consumer Demand, Production, Elasticity of Demand, Technology, Substitutes, Raw Materials, Seasonality, Unionization, Rate of Growth, Product durability, Location, Lumpiness of orders, Scale of economies, Method of purchase, Scope economies
• Structure: Number of Buyers and Sellers, Barriers to entry of new firms, product differentiation, Vertical integration, Diversification
• Conduct: Advertising, Research and Development, Pricing behavior, Plant Investment, Legal Tactics, Product choice, Collusion, Merger and Contracts
• Performance: Price, Production Efficiency, Allocative Efficiency, Equity, Product Quality, Technical Progress, Profits
• Government Policy: Regulation, Antitrust, Barriers to Entry, Taxes and Subsidies, Investment Incentives, Employment Incentives, Macroeconomic Policies

Market structures

The common market structures studied in this field are the following:

• Perfect competition
• Monopolistic competition
• Oligopoly
• Oligopsony
• Monopoly
• Monopsony

Areas of study

Industrial organization investigates the outcomes of these market structures in environments with

• Price discrimination
• Product differentiation
• Durable goods
• Experience goods
• Secondary markets or second-hand markets, which can affect the behaviour of firms in primary markets.
• Collusion
• Signaling, such as warranties and advertising.
• Mergers and acquisitions
• Entry and Exit

A competitive market structure has the performance outcome of lower costs and lower prices, (Shepherd, W: 1997:4).

The subject has a theoretical side and a practical side. According to one text book: "On one plane the field is abstract, a set of analytical concepts about competition and monopoly. On a second plane the topic is about real markets, teeming with the excitement and drama of struggles among real firms" (Shepherd, W.; 1985; 1).

The extensive use of game theory in industrial economics has led to the export of this tool to other branches of microeconomics, such as behavioral economics and corporate finance. Industrial organization has also had significant practical impacts on antitrust law and competition policy.

Footnote

1. ^ Modern Industrial Organization 4th edition, Dennis W. Carlton and Jeffery M. Perloff, Overview: page 2
2. ^ Modern Industrial Organization 4th edition, Dennis W. Carlton and Jeffery M. Perloff, Overview: page 2
3. ^ Modern Industrial Organization 4th edition, Dennis W. Carlton and Jeffery M. Perloff, Overview: page 3

References

• Handbook of Industrial Organization:

Richard Schmalensee and Robert Willig ed. (1989). v. 1. Description & contents link.

Richard Schmalensee , ed. (1989). v. 2. Description & contents link.

Mark Armstrong and Robert Porter, ed. (2007). v. 3 Description & contents link.

• Frederic M. Scherer, and David Ross (1990). Industrial Market Structure and Economic Performance, Houghton-Mifflin, 3rd ed.
• William Shepherd, (1985). The Economics of Industrial Organization, Prentice-Hall. ISBN 0-13-231481-9
• Richard Schmalensee (1987). Industrial Organization, The New Palgrave: A Dictionary of Economics, v. 2, pp. 803-08.
• Oz Shy, (1995) Industrial Organization: Theory and Applications MIT Press.
• Jean Tirole (1988) The Theory of Industrial Organization MIT Press.
• Xavier Vives (2001) Oligopoly Pricing: Old Ideas and New Tools MIT Press.
• http://wps.aw.com/aw_carltonper_modernio_4/

See also

• Important publications in industrial organization
• Competition policy
• Cournot competition
• Bertrand competition
• Input-output model
• Competition law
• Relevant market
• SSNIP