Developments in Major Fields of Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 22: Industrial organization
Are you seriously proposing that we abandon the concept of perfect competition, the theory of general equilibrium and the New Welfare Economics associated with perfectly competitive general equilibrium? Yes, that is precisely what I am proposing . . . But what are we then left with? We are left with the content of every chapter in every textbook on imperfect or monopolistic competition, on oligopoly, duopoly and monopoly, in short, on Industrial Organization as a sub-discipline in economics. (Blaug 1997: 79–80) As one can see from Mark Blaug’s quotation, industrial organization (IO) deals with imperfectly competitive markets. The discipline was founded in the 1930s, but before reconstructing its history it is useful to identify in detail its content, its tools, and its aims in the tables of contents of the three volumes of the Handbook of Industrial Organization (Schmalensee and Willig 1989; Armstrong and Porter 2007). They are: Technological determinants of firm and industry structure – The theory of the firm – Transaction cost economics – Vertical integration – Non-cooperative game theory for IO – Theories of oligopoly behavior – Cartels, collusion, and horizontal merger – Mobility barriers and the value of incumbency – Predation, monopolization, and antitrust – Price discrimination – Vertical contractual relations – Product differentiation – Imperfect information in the product market – The timing of innovation – The theory and the facts of how markets clear – Interindustry studies of structure and performance – Empirical studies of industries with market power – Empirical studies of innovation and market structure – Applications of experimental methods – Industrial organization and international trade – International differences in industrial organization – Economic perspectives on the politics of regulation – Optimal policies for natural monopolies – Design of regulatory mechanisms and institutions – The effects of economic regulation – The economics of health, safety and environmental regulation – The theory of regulation – Advertising – Empirical models of entry and market structure – Applied dynamic analysis in IO – Coordination and lock-in: competition with switching costs and network effects – Auctions – Foreclosure – Price discrimination and competition – Market structure – Antitrust policy toward horizontal mergers. This list gives the topics of today’s IO. This entry, as some other histories of the discipline (De Jong and Shepherd 2007; Bianchi 2013), will go no further than the early 1980s, so only some of these topics will be dealt with. However, other issues that today no longer belong to this field will be included. Specifically, apart from the occasional reference to later developments, all the subjects examined here are dealt with prior to the revolution in the discipline due to the introduction of game theory in the 1980s. To start with, a review of the economists’ ideas before the foundation of IO in the 1930s will help to find its historical roots.
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