Industrial organization

This article is about the field of economics. For the field of psychology, see Industrial and organizational psychology.

In economics, industrial organization is a field that extends the theory of the firm by analyzing the structure of firms and markets, as well as the boundaries between them. It introduces real-world features that depart from the perfectly competitive model, such as transaction costs,^[1] imperfect information, and barriers to entry faced by potential competitors.

The field studies how firms and markets are organized and how they behave across a spectrum ranging from competitive markets^[2] to monopoly,^[3] including cases shaped by government intervention and regulation.

Industrial organization combines theoretical models and empirical analysis to study issues such as market power, competition policy, oligopoly behavior, pricing strategies, vertical integration, and the design of contracts and institutions. It has applications in public policy, business strategy, and the regulation of industries.

There are different approaches to the subject. One approach is descriptive in providing an overview of industrial organization, such as measures of competition and the size-concentration of firms in an industry. A second approach uses microeconomic models to explain internal firm organization and market strategy, which includes internal research and development along with issues of internal reorganization and renewal.^[4] A third aspect is oriented to public policy related to economic regulation,^[5] antitrust law,^[6] and, more generally, the economic governance of law in defining property rights, enforcing contracts, and providing organizational infrastructure.^[7][8]

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.^[9]

The development of industrial organization as a separate field owes much to Edward Chamberlin,^[10] Joan Robinson, Edward S. Mason,^[11] J. M. Clark,^[12] Joe S. Bain^[13] and Paolo Sylos Labini, among others.^[14][15]

Subareas

The Journal of Economic Literature (JEL) classification codes are one way of representing the range of economics subjects and subareas. There, Industrial Organization, one of 20 primary categories, has 9 secondary categories, each with multiple tertiary categories.^[16] The secondary categories are listed below with corresponding available article-preview links of The New Palgrave Dictionary of Economics Online and footnotes to their respective JEL-tertiary categories and associated New-Palgrave links.

JEL: L1 – Market Structure, Firm Strategy, and Market Performance^[17]

JEL: L2 – Firm Objectives, Organization, and Behavior^[18]

JEL: L3 – Non-profit organizations and Public enterprise^[19]

JEL: L4 – Antitrust Issues and Policies^[20]

JEL: L5 – Regulation and Industrial policy^[21]

JEL: L6 – Industry Studies: Manufacturing^[22]

JEL: L7 – Industry Studies: Primary Products and Construction^[23]

JEL: L8 – Industry Studies: Services^[24]

JEL: L9 – Industry Studies: Transportation and Utilities^[25]

Market structures

The common market structures studied in this field are: perfect competition, monopolistic competition, duopoly, oligopoly, oligopsony, monopoly and monopsony.

Areas of study

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

• Price discrimination
• Product differentiation
• Durable goods
• Experience goods
• Collusion
• Signalling, such as warranties and advertising.
• Mergers and acquisitions
• Entry and Exit

History of the field

A 2009 book Pioneers of Industrial Organization traces the development of the field from Adam Smith to recent times and includes dozens of short biographies of major figures in Europe and North America who contributed to the growth and development of the discipline.^[26]

Other reviews by publication year and earliest available cited works those in 1970/1937,^[14] 1972/1933,^[27] 1974,^[28] 1987/1937-1956 (3 cites), 1968–9 (7 cites),^[29] 2009/c. 1900,^[30] and 2010/1951.^[31]

See also

Main article: Outline of industrial organization

• Bertrand competition
• Bertrand–Edgeworth model
• Competition policy
• Cournot competition
• Input–output model
• Important publications in industrial organization
• Structure–conduct–performance paradigm