Industrial organization

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In economics, industrial organization or industrial economy is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, [1] limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior as between competition [2] and monopoly, [3] including from government actions.

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market.

Market (economics) Mechanisms whereby supply and demand confront each other and deals are made, involving places, processes and institutions in which exchanges occur.

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and resource allocation in a society. Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.

Contents

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 as 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 most common concentration ratios are the CR4 and the CR8, which means the market share of the four and the eight largest firms. Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to illustrate the degree to which an industry is oligopolistic.

Public policy is the principled guide to action taken by the administrative executive branches of the state with regard to a class of issues, in a manner consistent with law and institutional customs.

Infrastructure fundamental facilities and systems serving a country, city, or other areas

Infrastructure is the fundamental facilities and systems serving a country, city, or other area, including the services and facilities necessary for its economy to function. Infrastructure is composed of public and private physical improvements such as roads, bridges, tunnels, water supply, sewers, electrical grids, and telecommunications. In general, it has also been defined as "the physical components of interrelated systems providing commodities and services essential to enable, sustain, or enhance societal living conditions".

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]

Game theory is the study of mathematical models of strategic interaction between rational decision-makers. It has applications in all fields of social science, as well as in logic and computer science. Originally, it addressed zero-sum games, in which each participant's gains or losses are exactly balanced by those of the other participants. Today, game theory applies to a wide range of behavioral relations, and is now an umbrella term for the science of logical decision making in humans, animals, and computers.

Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.

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]

Edward Chamberlin American economist

Edward Hastings Chamberlin was an American economist. He was born in La Conner, Washington, and died in Cambridge, Massachusetts.

Joan Robinson English economist

Joan Violet Robinson was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.

John Maurice Clark American economist

John Maurice Clark (1884–1963) was an American economist whose work combined the rigor of traditional economic analysis with an "institutionalist" attitude. Clark was a pioneer in developing the notion of workable competition and the theoretical basis of modern Keynesian economics, including the concept of the economic multiplier.

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.

Articles in economics journals are usually classified according to the JEL classification codes, a system originated by the Journal of Economic Literature. The JEL is published quarterly by the American Economic Association (AEA) and contains survey articles and information on recently published books and dissertations. The AEA maintains EconLit, a searchable data base of citations for articles, books, reviews, dissertations, and working papers classified by JEL codes for the years from 1969. A recent addition to EconLit is indexing of economics-journal articles from 1886 to 1968 parallel to the print series Index of Economic Articles.

The New Palgrave Dictionary of Economics (2018), 3rd ed., is an twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictionary, and a significant increase in new entries from the previous editions by the most prominent economists in the field, among them 36 winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Articles are classified according to Journal of Economic Literature(JEL) classification codes.

JEL: L1Market Structure, Firm Strategy, and Market Performance [17]
JEL: L2 – Firm Objectives, Organization, and Behavior [18]
JEL: L3Non-profit organizations and Public enterprise [19]
JEL: L4Antitrust Issues and Policies [20]
JEL: L5Regulation 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 the following:

Areas of study

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

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

Notes

  1. R. H. Coase, 1937. "The Nature of the Firm", Economica, N.S., 4(16), pp. 386–405.
     • _____, 1988. "The Nature of the Firm: Influence", Journal of Law, Economics, & Organization, 4(1), pp. 33–47. Reprinted in The Nature of the Firm: Origins, Evolution, and Development, 1993, O. E. Williamson and S, G. Winter, ed., pp. 61–74.
     • _____, 1991. "The Institutional Structure of Production", Nobel Lecture, reprinted in 1992, American Economic Review, 82(4), pp. 713–719.
     Oliver E. Williamson, 1981. "The Economics of Organization: The Transaction Cost Approach", American Journal of Sociology, 87(3), pp. 548–577.
     • _____, 2009. "Transaction Cost Economics: The Natural Progression", Nobel Lecture. Reprinted in 2010, American Economic Review, 100(3), pp. 673–90.
  2. George J. Stigler, [1987] 2008. "competition", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  3. Luigi Zingales, 2008. "corporate governance", The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
     • Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract", Journal of Economic Perspectives, 16(3), pp. 171–195.
     Frederic M. Scherer and David Ross, 1990. Industrial Market Structure and Economic Performance, 3rd ed. Description and 1st ed. review extract.
      • Dennis W. Carlton and Jeffrey M. Perloff, 2004. Modern Industrial Organization, 4th edition, pp. 2–3. Description.
  4. • Frederic M. Scherer and David Ross, 1990. Industrial Market Structure and Economic Performance, 3rd ed. Description and 1st ed. review extract.
     • Dennis W. Carlton and Jeffery M. Perloff, 2004. "Modern Industrial Organization, Overview", ch. 5, Handbook of Industrial Organization, Elsevier, v. 1, pp. 259–327. Fudenberg, Drew; Tirole, Jean (1989). "Chapter 5 Noncooperative game theory for industrial organization: An introduction and overview". Handbook of Industrial Organization Volume 1. Handbook of Industrial Organization. 1. pp. 259–327. doi:10.1016/S1573-448X(89)01008-3. ISBN   9780444704344.
     Carl Shapiro, 1989. "The Theory of Business Strategy", RAND Journal of Economics, 20(1), pp. 125–137.
     • Kyle Bagwell and Asher Wolinsky (2002). "Game theory and Industrial Organization", ch. 49, Handbook of Game Theory with Economic Applications, v. 3, pp. 1851–1895 Bagwell, Kyle; Wolinsky, Asher (2002). "Chapter 49 Game theory and industrial organization". Handbook of Game Theory with Economic Applications Volume 3. Handbook of Game Theory with Economic Applications. 3. pp. 1851–1895. doi:10.1016/S1574-0005(02)03012-6. ISBN   9780444894281.
     Martin Shubik, 1987. A Game-Theoretic Approach to Political Economy, Part II. MIT Press. Description. Archived May 3, 2011, at the Wayback Machine
  5. Richard Schmalensee and Robert Willig, eds., 1989. Handbook of Industrial Organization, Elsevier, v. 2, Part 5, Government Intervention in the Marketplace, ch. 22–26, abstract links.
  6. Richard A. Posner, 2001. Antitrust Law, 2nd ed. University of Chicago Press. Preview.
     • D. L. Rubinfeld, 2001. "Antitrust Policy", International Encyclopedia of the Social & Behavioral Sciences , pp. 553–560. Archived September 5, 2015, at the Wayback Machine
  7. Avinash K. Dixit, 2008. "economic governance", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
     Oliver E. Williamson, 1996. The Mechanisms of Governance, "Prologue", pp. 3–20.
  8. George J. Stigler, 1983. The Organization of Industry, University of Chicago Press. Description and contents links and preview.
     Richard Schmalensee, 1988. "Industrial Economics: An Overview", Economic Journal, 98(392), pp. 643–681. Working paper link.
     Handbook of Industrial Organization, Elsevier:
    Richard Schmalensee and Robert Willig, ed., 1989. v. 1. Links to description & contents & (partial) chapter outlines.
    _____, ed., 1989. v. 2. Links to description & contents and chapter outlines.
    Mark Armstrong and Robert Porter, ed., 2007. v. 3. Links to description, chapter-content descriptions
  9. Exemplified in such advanced textbooks as Jean Tirole, 1988, The Theory of Industrial Organization, MIT Press, description and chapter-preview links.
  10. • Edward Hastings Chamberlin, 1933. The Theory of Monopolistic Competition: A Re-orientation of the Theory of Value, 1965, 8th ed. Harvard University Press.
     • R. Rothschild, 1987. "The Theory of Monopolistic Competition: E.H. Chamberlin's Influence on Industrial Organisation Theory over Sixty Years", Journal of Economic Studies, 14(1), pp. 34–54. Abstract.
     • William L. Baldwin, 2007. "Edward Hastings Chamberlin", in Pioneers of Industrial Organization, H. W. de Jong, W. G. Shepherd, ed., pp. 199–.
  11. Edward S. Mason, 1939. "Price and Production Policies of Large-Scale Enterprise", American Economic Review, 29(1, Supplement), pp. 61–74.
     • _____, 1949. "The Current Status of the Monopoly Problem in the United States", 'Harvard Law Review, 62(8), pp. 1265–1285.
     • _____, 1957.
    Economic Concentration and the Monopoly Problem, Harvard University Press. Review extract.
     • William G. Shepherd, 2007. "Edward S. Mason", in
    Pioneers of Industrial Organization, H. W. de Jong, W. G. Shepherd, ed.
  12. J.M. Clark, 1940. Toward a Concept of Workable Competition. American Economic Review, Vol. 30, No. 2, Part 1, Jun., pp. 241–256
     • William L. Baldwin, 2007. "John Maurice Clark" in Pioneers of Industrial Organization, H. W. de Jong, W. G. Shepherd, ed., pp. 183–186.
  13. • Joe S. Bain, 1956. Barriers to New Competition: Their Character and Consequences in Manufacturing, Harvard University Press. Review extracts .
     • _____, 1959, 2nd ed., 1968. Industrial Organization: A Treatise, John Wiley.
     
    Richard E. Caves, 2007. "Joe S. Bain", in Pioneers of Industrial Organization, H. W. de Jong, W. G. Shepherd, ed., pp. 224–231.
  14. 1 2 E. T. Grether, 1970. "Industrial Organization: Past History and Future Problems", American Economic Review, 60(2), pp. 83–89.
  15. Oliver E. Williamson, ed., 1990. Industrial Organization, Edward Elgar. Description and article list. 23 articles, dating from 1937 to 1987. Archived July 22, 2011, at the Wayback Machine
  16. A complete list of the JEL Industrial Organization codes is at JEL classification codes#Industrial organization JEL: L Subcategories.
  17. JEL: L10 – General
    JEL: L11 – Production, Pricing, and Market structure; Size Distribution of Firms
    JEL: L12Monopoly; Monopolization Strategies
    JEL: L13Oligopoly and Other Imperfect Markets
    JEL: L14 – Transactional Relationships; Contracts and Reputation; Networks
    JEL: L15 – Information and Product Quality; Standardization and Compatibility
    JEL: L16 – Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
    JEL: L17Open Source Products and Markets
  18. JEL: L20 – General
    JEL: L21 – Business Objectives of the Firm
    JEL: L22 – Firm Organization and Market Structure
    JEL: L23 – Organization of Production
    JEL: L24Contracting Out; Joint Ventures; Technology licensing
    JEL: L25 – Firm Performance: Size, Diversification, and Scope
    JEL: L26 – Entrepreneurship
  19. JEL: L31 – Nonprofit Institutions; NGOs
    JEL: L32 – Public enterprises; Public-Private Enterprises
    JEL: L33 – Comparison of Public and Private Enterprises; Privatization; Contracting out
  20. JEL: L40 – General
    JEL: L41 – Monopolization; Horizontal Anticompetitive Practices
    JEL: L42 – Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    JEL: L43 – Legal Monopolies and Regulation or Deregulation
    JEL: L44 – Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
  21. JEL: L51 – Economics of Regulation
    JEL: L52 – Industrial Policy; Sectoral Planning Methods
    JEL: L53] – Enterprise Policy
  22. JEL: L61 – Metals and Metal Products; Cement; Glass; Ceramics
    JEL: L62 – Automobiles; Other Transportation Equipment
    JEL: L63 – Microelectronics; Computers; Communications Equipment
    JEL: L64 – Other Machinery; Business Equipment; Armaments
    JEL: L65 – Chemicals; Rubber; Drugs; Biotechnology
    JEL: L66 – Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
    JEL: L67 – Other Consumer Nondurables: Clothing, Textiles, Shoes, and Leather
    JEL: L68 – Appliances; Other Consumer Durables
  23. JEL: L71 – Mining, Extraction, and Refining: Hydrocarbon Fuels
    JEL: L72 – Mining, Extraction, and Refining: Other Nonrenewable Resources
    JEL: L73 – Forest Products
    JEL: L74 – Construction
    JEL: L78 – Government Policy
  24. JEL: L80 – General
    JEL: L81 – Retail and Wholesale Trade; e-Commerce
    JEL: L82 – Entertainment; Media (Performing Arts, Visual Arts, Broadcasting, Publishing, etc.)
    JEL: L83 – Sports; Gambling; Recreation; Tourism
    JEL: L84 – Personal, Professional, and Business Services
    JEL: L85 – Real Estate Services
    JEL: L86 – Information and Internet Services; Computer Software
    JEL: L87 – Postal and Delivery Services
    JEL: L88 – Government Policy
  25. JEL: L91 – Transportation: General
    JEL: L92 – Railroads and Other Surface Transportation
    JEL: L93 – Air transportation
    JEL: L94 – Electric utilities
    JEL: L95 – Gas Utilities; Pipelines; Water Utilities
    |JEL: L96 – Telecommunications
    JEL: L97 – Utilities: General
    JEL: L98 – Government Policy
  26. Henry W. de Jong and William G. Shepherd, ed., 2007. Pioneers of Industrial Organization. Cheltenham, UK: Elgar. Description and content links and preview. Archived August 7, 2011, at the Wayback Machine
  27. James W. McKie, 1972. "Industrial Organization: Boxing the Compass", ch. 1 in V. R. Fuchs, ed., Policy Issues and Research Opportunities in Industrial Organization, NBER, pp. 1-15.
  28. Almarin Phillips and Rodney E. Stevenson, 1974. "The Historical Development of Industrial Organization", History of Political Economy, 6(3), pp. 324–342. In Papers from the First Conference of the History of Economics Society. Citation.
  29. Timothy F. Bresnahan and Richard Schmalensee, 1987. "The Empirical Renaissance in Industrial Economics: An Overview", Journal of Industrial Economics, 35(4), pp. 371–378.
  30. Lefteris Tsoulfidis, 2009. "Between Competition and Monopoly", Competing Schools of Economic Thought, ch. 9, pp. 213–42. Springer
  31. Liran Einav and Jonathan Levin, 2010. "Empirical Industrial Organization: A Progress Report", Journal of Economic Perspectives, 24(2), pp. 145–162.

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References

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