In economics, industrial organization 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, 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 on a continuum between competition and monopoly, including from government actions.
Industrial organization is a field of economics dealing with the strategic behavior of firms, regulatory policy, antitrust policy and market competition. Industrial organization applies the economic theory of price to industries. Economists and other academics who study industrial organization seek to increase understanding of the methods by which industries operate, improve industries’ contributions to economic welfare, and improve government policy in relation to these industries.
The “industrial” in industrial organization refers to any large-scale business activity, such as tourism or agriculture not just manufacturing. Industrial organization is also sometimes referred to as “industrial economy.”
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. A third aspect is oriented to public policy related to economic regulation, antitrust law, and, more generally, the economic governance of law in defining property rights, enforcing contracts, and providing organizational infrastructure.
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.
Industrial Organization Areas of Study
- Market power
- Product differentiation
- Price discrimination
- Durable goods and experience goods
- Secondary markets and their relationship with primary markets
- Mergers and acquisitions
- Antitrust and competition
- Industrial policy