Industrial organization

Industrial organization is the field of economics that studies the strategic behavior of firms, the structure of markets and their interactions. It is also referred to as "Industrial Economics", but perhaps a most appropriate term is the "Economics of Imperfect Competition".

Theoretical analysis in the field is heavily based on game theory. It should not be confused with the related psychological area, Industrial and organizational psychology.

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

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

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).

Given that it was the first field that used game theory in economics, industrial organization has become the natural exporter of methodological tools to other branches of microeconomics, such as organization economics and corporate finance. Industrial organization has also had significant practical impacts on antitrust law and competition policy.

References

• Scherer, Frederic M., and David Ross (1990). Industrial Market Structure and Economic Performance, Houghton-Mifflin, 3rd ed.
• Shepherd, William (1985). The Economics of Industrial Organization, Prentice-Hall. ISBN 0-13-231481-9 This is an undergrad text.
• Schmalensee, Richard (1987). Industrial Organization, The New Palgrave: A Dictionary of Economics, v. 2, pp. 803-08.
• Shy, Oz (1995) Industrial Organization: Theory and Application, MIT Press. This is an advanced undergraduate text.
• Tirole, Jean (1988) The Theory of Industrial Organization, MIT Press. This is a graduate textbook in the field. The book requires extensive knowledge of calculus as well as game theory.
• Vives, Xavier (2001) Oligopoly Pricing: Old Ideas and New Tools, MIT Press. This is also a graduate textbook that follows a game-theoretic approach.

See also

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