Industrial organization is a field of economics that tackles the strategic behaviors of firms, regulatory policies, and market competition. It applies the economic theory of price to industries. Academics and economists who dive into the world of industrial organization aim to understand the ways industries operate, improve their contributions to economic welfare, and enhance government policies towards these industries.
The ‘industrial’ in industrial organization encompasses any large-scale business activity such as tourism or agriculture, not just manufacturing. It’s also known sometimes as ‘industrial economy.’
Key Learnings
- Industrial organization analyzes operational and strategic factors that contribute to a firm’s strategy and product positioning.
- It covers a wide range of areas including market power, product differentiation, and industrial policy, all of which impact a firm’s operations.
Deep Dive into Industrial Organization
The study of industrial organization builds on the theory of the firm, a collection of economic theories that explain a firm’s existence, behavior, structure, and its interaction with the market.
In a notable 1989 paper, economists Bengt Holmstrom and Jean Tirole posed two fundamental questions for the theory of the firm. First: Why do firms exist? This question targets the purpose they serve in an economic system. The second question relates to determining the scale and scope of their operations.
Answers to these questions form the pillars of industrial organization economics. It focuses on market and industry competition, considering real-world complications like government intervention, transaction costs, and barriers to entry.
Some miš argue that since microeconomics deals with markets, industrial organization is a subset of it. While this may be partially true, industrial organization primarily focuses on market interactions such as price competition, product placement, advertising, research, and more.
Imperfect Competition
According to economists, it’s often easier to illustrate industrial organization with examples than define it. The term ’economics of imperfect competition’ captures its essence well. It involves analyzing factors contributing to the success or failure of products or organizations.
Areas of Study
Here’s a snapshot of topics industrial organization can focus on:
- Market power
- Product differentiation
- Price discrimination
- Durable goods and experience goods
- Secondary markets and their correlation with primary markets
- Collusion
- Signaling
- Mergers and acquisitions
- Antitrust and competition
- Industrial policy
Industrial Organization and Policy Influences
Several organizations favor research and collaboration in this domain. One prominent professional body is the Industrial Organization Society (IOS), promoting research on antitrust and regulatory policies, competition, and market power in real-world markets. The ‘Review of Industrial Organization’ journal and the annual International Industrial Organization Conference further support academic contribution.
Exemplifying Industrial Organization
To see industrial organization at work, let’s deep dive into the smartphone industry. Apple Inc. introduced mainstream smartphones with sleek designs and user-friendly features. However, they came with a steep price tag. To ensure broader adoption without reducing profits, Apple partnered with network providers for installment plans that defrayed costs.
Apple’s sales soared until Samsung and Google disrupted the market with cheaper, feature-rich alternatives. This competition boosted the overall industry’s growth, expanding its reach globally. Consequently, numerous other manufacturers entered the market.
This tale from the smartphone industry raises several intriguing questions:
- Why were Apple’s phones expensive?
- What innovations enabled Samsung and Google to produce cheaper phones?
- What led network providers to partner with smartphone manufacturers?
- How did Apple attempt to retain its market lead?
- What regulations contributed to this industry’s success?
By diving into such questions, industrial organization aims to unveil the mechanisms driving industries.
Related Terms: antitrust, theory of price, theory of firm, oligopolies, perfect competition.
