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Industrial organization is a field of economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 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
Barriers to entry

In economics and especially in the theory of competition, barriers to entry are obstacles in the path of a company that make it difficult to enter a given market....
 by new firms into a market. It then considers how firms are organized and how they compete.






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Industrial organization is a field of economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 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
Barriers to entry

In economics and especially in the theory of competition, barriers to entry are obstacles in the path of a company that make it difficult to enter a given market....
 by new firms into a market. It then considers how firms are organized and how they compete. 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 Chamberlin

Edward Hastings Chamberlin was an United States economist. He was born in La Conner, Washington.Chamberlin studied first at the University of Iowa , then pursued graduate-level studies at the University of Michigan, eventually receiving his Ph.D....
, Edward S. Mason and Joe S. Bain
Joe S. Bain

Joe S. Bain was an American economist, and can be seen as one of the founders of industrial economics.He identified and quantified ?barriers to entry? into imperfectly competitive industries by measuring factors such as initial capital requirements, threat of price cutting by established firms, and product differentiation....
.

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.

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. 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
    Perfect competition

    In neoclassical economics and microeconomics, perfect competition describes a market in which there are many small firms, all producing homogeneous goods....
  • Monopolistic competition
    Monopolistic competition

    Monopolistic competition is a common market form. Many markets can be considered monopolistically competitive, often including the markets for restaurants, cereal, clothing, shoes and service industries in large cities....
  • Oligopoly
    Oligopoly

    An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived from the Greek language for few sell....
  • Oligopsony
    Oligopsony

    An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in market for inputs where a small number of firms are competing to obtain factors of production....
  • Monopoly
    Monopoly

    In economics, a monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it....
  • Monopsony
    Monopsony

    In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers....


Areas of study

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

    Price discrimination exists when sales of identical good or Service are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where...
  • Product differentiation
    Product differentiation

    In marketing, product differentiation is the process of distinguishing the differences of a product or offering from others, to make it more attractive to a particular target market....
  • Durable goods
  • Experience goods
  • Secondary markets or second-hand markets, which can affect the behaviour of firms in primary markets.
  • Collusion
    Collusion

    Collusion is an agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law typically involving fraud or gaining an unfair advantage....
  • Signaling, such as warranties and advertising.
  • Mergers and acquisitions
  • Entry and Exit
    Exit

    'EXIT' or 'exit' from the Latin language ...


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
Game theory

Game theory is a branch of applied mathematics that is used in the social sciences , biology, engineering, political science, international relations, computer science , and philosophy....
 in industrial economics has led to the export of this tool to other branches of microeconomics
Microeconomics

Microeconomics is a branch of economics that studies how individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold....
, such as behavioral economics and corporate finance
Corporate finance

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions....
. Industrial organization has also had significant practical impacts on antitrust law and competition policy.

Footnote



See also

  • Important publications in industrial organization
    List of publications in economics

    MacroeconomicsAmong the most important list of publication in economics are:...
  • List of topics in industrial organization
  • Competition policy
  • Cournot competition
    Cournot competition

    Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time....
  • Bertrand competition
    Bertrand competition

    Bertrand competition is a model of competition used in economics, named after Joseph Louis Fran?ois Bertrand . Specifically, it is a model of price competition between duopoly firms which results in each charging the price that would be charged under perfect competition, known as marginal cost pricing....
  • Input-output model
    Input-output model

    The Input-output model of economics uses a matrix representation of a nation's economy to predict the effect of changes in one industry on others and by consumers, government, and foreign suppliers on the economy....
  • Competition law
    Competition law

    Competition law, known in the United States as antitrust law, has three main elements:*prohibiting agreements or practices that restrict free trading and competition between business entities....
  • Relevant market
    Relevant market

    In competition law the Relevant market defines the market in which one or more goods compete. Therefore, the Relevant market defines whether two or more products can be considered substitute goods and whether they constitute a particular and separate market for competition analysis....
  • SSNIP