Industrial organization

The Industrial Economics (also Industrial Organization or Industrial Economics) is an economic approach, which deals with the interaction between the market and the company. This competition processes are considered in all markets. In addition to industrial sectors include all economic sectors. The Industrial Economics uses microeconomic methods and concepts, but differs in focusing on partial analysis and the incomplete competition.

As the modern industrial economics deals with recourse to mathematical game theory, increasingly, with the means of action of individual companies, the industrial economics has also become increasingly important for business administration, especially to get the strategic management. In addition, there is a close resemblance to the theory of competition. The Industrial Economics also provides a scientific basis for competition policy, media economics, organization theory and marketing.

History of the approach

The study of markets where there is only imperfect competition, dating back to the thirties of the 20th century. In the 1950s it was the economist Joe Bain, who first classified the different forms of imperfect competition on the basis of extensive empirical studies. He also described the rules by which companies that are established on such imperfect markets, new competitors barrier to market access or can deny. The English name of this branch of research ( Industrial Organization ) coined Bain by publishing a book of the same name. Besides Bain also the work of the also attributable to the Harvard School Sagendorph Edward Mason has been significant.

In the 60s and 70s, the concepts Bains were further elaborated to one, in particular his concept of barriers to entry has been expanded to the exit and mobility barriers. On the other hand began to apply concepts of mathematical game theory to industrial organization, in recognition of the interdependence of an established supplier and the potential newcomer to better meet. Based on the oligopoly models of Antoine -Augustin Cournot ( Cournot oligopoly ), Joseph Bertrand ( Bertrand competition) and Alfred Marshall, the works of Edward Hastings Chamberlin and Joan Robinson in the field of monopolistic competition, and the Hotelling's law of Harold Hotelling was the industrial Economics developed.

Beginning of the 80s turned the economist Michael E. Porter of the conventionally welfare theory oriented industrial economics on individual companies and began to explore the question of what lessons the individual operation could draw from a strategic point from the findings of Industrial Economics. He justified this approach one of the most influential schools of strategic management, the Market - Based View.

Principles of the approach

The Industrial Economics is concerned with the mechanisms that act on markets characterized by concentrations provider and market definitions. This includes both the functional requirements and ways of competitive processes, such as competition and innovation processes as such. Object is the microeconomic pricing policy springing question of the optimal allocation, which is realized by a functional competition. The focus is on the market structure - market behavior market outcome paradigm, which has through the analysis of relevant environmental layers parallel to the Management Research: How the interplay of organizational capacity and environmental conditions (market structure) on the strategy (market behavior) acts on the company's results (market income).

The Industrial Economics asks about the influence that the structure (organization) in an industry ( Bain called industry ) and an oligopolistic group within an industry on the behavior and so has the economic success of the members of the industry or group. Since the industrial economics to explain the economic success of companies from the market structure out, the elaboration of the relevant parameters of the market structure and the following classification of possible market formations for it has a special meaning. Bain is different markets or sectors along three parameters:

• The degree of concentration of suppliers,
• The degree of product differentiation and
• The height of the entry barriers to the industry or the market.

In the industrial organization studies have been conducted on the relationship between market structure and market performance, which in particular is committed to the explanation of the success of differences in inter- industry comparison. Parallels between management issues and industrial economics are seen primarily in terms of content and the relevant environmental neckline. Thus, the interplay of organizational skills and the environment ( structure) affects the strategy ( behavior) to the company's success (result). Overall, three directions can be distinguished:

Concentration of suppliers

As an industry, Bain called sub-groups of companies within the economic sectors, since their products are strong substitutes in the eyes of potential buyers and appeal to a common group of buyers ( should) be in direct competition with each other. The concentration of suppliers within an industry, operationalized as the number of competitors and the size of their individual market shares held by Bain mainly for two reasons important: At a higher concentration of suppliers the incentive for the individual competitors with its competitors rises to cooperate to jointly define a profit -enhancing ' industry Award ', which correspond to a monopolistic price, or can at least approach this, and corresponding production volumes. Parallel decreases for each competitor the incentive to achieve by independent competition policy an increasing their market share and profits, each of which can go only at the expense of competitors.

Product differentiation

Bain considered product differentiation from the standpoint of (potential) buyer of a good. The stronger two goods a buyer appear to be different, the less is the one is a substitute for the other and the lower the cross-price elasticity of demand of both goods will be. In this sense, product differentiation is closely related to the concept Bains industry, which is characterized in that the belonging to an industrial products represent relatively good substitutes in the eyes of the buyer. Within an industry, it is therefore necessary for the existence of product differentiation that different groups of buyers evaluate various competing products differently. Then certain buyers are in the same product prices, certain buyers that purchase a product other a competing product and, at different prices, be prepared to pay a higher price for a higher valued product, while others just move to purchase due to relatively lower prices his will. The existence of product differentiation, each provider has due to the different preferences that have placed different types of customers to different products, over a more or less large price range within which he can vary the price of his product without losing all customers with price increases and for price decreases the competitors take away the customers.

Barriers to entry

The central element of market structure analysis of industrial economics are the entry barriers. The concept of entry barriers differs between companies that are already established in an industry and the market with their products supply ( incumbents ) and those companies that are not established in the industry, but this is by building a new factory and use their production capacity could try for an offer on the market ( potential suppliers ). Companies, the ' buy ' by the acquisition of an existing factory in an industry that Bain is not one explicitly to the potential suppliers, since it is not the production capacity of the industry is changed.

The height of a barrier to entry refers to the extent to which incumbents in the long run can raise their offer prices on the given by the minimum average cost level of competition without are encouraged to enter the industry, the potential suppliers, the entry barrier price. The fact that neither the group nor the established group of potential suppliers is generally homogeneous, Bain carries by a further distinction statement: He differentiated between direct and general conditions of entry. The direct entry conditions refer to the percentage excess of the offer price over the minimum average cost that the most protected by entry barriers established provider may require without causing the entry of the least deprived potential suppliers. The general entry requirements are based on the sequence of the values ​​of the immediate entry conditions that would arise if the potential provider - would establish successively in the industry - in order of increasing deprivation through the barriers to entry.

Classically, three groups are called barriers to entry:

Game Theoretical Approaches

The modern industrial organization literature ( see, eg, Tirole, or Impaler / meadow) is an application of the non-cooperative game theory to the matters covered by Bain questions on the merits. The basic game-theoretic models of industrial economics come from Antoine -Augustin Cournot ( Cournot oligopoly ) and Joseph Bertrand ( Bertrand competition). These are treated as both stages games ( one-time action selection) as well as repeated games ( repeated action choice).

Often one considers zweiperiodige models. For example, select the companies in the first stage, a research and development budget, which (with certain probabilities ) reduces costs. The subsequent quantity or price competition is affected by the new cost structures. Similarly, treating product differentiation (eg Hotelling product space ), promotion, quality competition or compatibility competition.