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. For most of the post-WW II era the central paradigm of industrial organization was the Structure-Conduct-Performance or SCP-model. Since the 1980's theoretical analysis in the field has become heavily based on game theory^[2].

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).

Since game theory has been used more extensively in industrial economics, this has also led to export of this tool 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.

Footnote

1. ↑ Modern Industrial Organization 4th edition, Dennis W. Carlton and Jeffery M. Perloff, Overview: page 1
2. ↑ It should not be confused with the related psychological area, Industrial and organizational psychology.

External 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
• Schmalensee, Richard (1987). Industrial Organization, The New Palgrave: A Dictionary of Economics, v. 2, pp. 803-08.
• Shy, Oz (1995) ''Industrial Organization: Theory and Applications'' MIT Press.
• Tirole, Jean (1988) ''The Theory of Industrial Organization'' MIT Press.
• Vives, Xavier (2001) ''Oligopoly Pricing: Old Ideas and New Tools'' MIT Press.

See also

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

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