What is Industrial Organizations in Economics?

By Ferdinand Bada on January 17 2020 in Economics

Person holding iPhone. Photo by Halfpoint.
Person holding iPhone. Photo by Halfpoint.

Introduction

Also known as industrial economy, industrial organization refers to the field that examines the structure of firms and markets. Building on top of the theory of the firm, this field examines things like regulatory policy, market competition, strategic behavior of companies, and antitrust policy. The word “industrial” implies any organization or business activity that can be considered large-scale, which means things like agriculture and tourism are also included. It does not simply apply to the manufacturing sector as the traditional sense of the word may imply.

This field also makes extensive use of game theory, which has actually improved its popularity. The increase in the popularity of industrial economy has seen its application stretch to other areas of microeconomics such as corporate finance and behavioral economics. Some of the market structures it deals with include perfect competition, duopoly, monopoly, and monopolistic competition.

History

The theory of the firm is a popular theory that states that the main goal of a company is to maximize profits and minimize costs. In other words, it is trying to answer the question of why firms exist in the first place, its behavior, structure, and how it relates to its customers. Building on top of this, economists Jean Tirole and Bengt Holmstrom posed two more questions for the theory in 1989.

The first question seeks to explain the need that a firm fulfills in the first place while the second tries to determine the operations’ scope and scale. At its core, industrial organization is founded on the answers to these two questions. It is crucial to understand that industrial organization is not a branch of microeconomics simply because it focuses on markets and operations. Industrial organization places an emphasis on market interactions such as product placement, price competition, research and development, and other things.

Approaches to industrial economy

There are three different approaches or aspects related to industrial economy. The first is descriptive, that is, it provides a description of industrial organization including things like competition. The second uses microeconomic models to try to come up with explanations for the internal organization of a firm and the strategy it uses for the market. This explanation also includes matters of internal renewal and reorganization as well as research and development. The third and last approach deals with public policy pertaining to matters like antitrust law and economic regulation. More broadly, however, this last approach deals with property rights definition, giving organizational infrastructure, and contract enforcement.

Example

In order to fully comprehend industrial economy, the example of Apple Inc, the smartphone making company, is going to help. Apple made attractive smartphones with plenty of features that are eye-catching to the consumer. However, the cost of the gadget was too high when it came up thus locking out many people. In order to reduce the cost of the device and still make a profit, Apple teamed up with network providers to achieve that goal.

When Google, Samsung, and other firms came up, they offered consumers with cheaper alternatives that had the same features. This scenario provides a number of questions that can be explained by industrial organization. Some of these questions seek to determine why Apple priced its devices highly, how network providers helped to reduce the costs, and the attempts by Apple to deal with the competition.

More in Economics