What does industrial organization mean?
Industrial organization is an area of economics that studies how businesses make decisions, government rules, trade laws, and competition in the market. The economic idea of price is used in industrial organizations. Economists and other students who study IO aim to understand better how businesses work, make businesses more beneficial to the economy, and improve government policies for these businesses.
It’s not just ” industrial ” production in industrial organizations; it can also be any large-scale business activity, like farming or tourism. This field of study is also known as “industrial organization” or “industrial economy.”
How to Understand Industrial Organization
The study of industrial organization is based on the theory of the firm, a group of economic ideas that try to explain and describe what a firm is like in terms of its existence, behavior, structure, and connection to the market.
Economists Bengt Holmstrom and Jean Tirole asked two straightforward questions about the firm in a study they wrote in 1989. The first question asked, “Why do firms exist?” or “What need do they fill in society or the economy?” The second question comes after the first one and is about determining how big and wide their operations are.
Industrial organization economics is based on the answers to these two questions. Industrial organization is mainly concerned with how markets and industries fight. It considers issues in the real world, like when the government gets involved in the market, transaction costs, barriers to entry, and more.
Some people think that industrial organization is a part of microeconomics because microeconomics is the study of markets and how they work. Instead, IO is based on how things work in the market, like how prices are set, where products are placed, promotion, research and development, and more.
More importantly, the industrial organization is based on studying oligopolies, markets where a few big players control most of the business. This is different from microeconomics, which is about studying perfect competition or strong monopolies.
An MIT white paper says it is easier to explain industrial organization with an example than a definition. However, the writers of the white paper were able to come up with this definition: the “economics of imperfect competition.” This “imperfect competition” description raises questions about what causes success or failure. IOs try to answer these questions in organizations that lead to success or failure.
Areas of Study in Industrial Organization
Here are some examples of things that can be studied in industrial organizations:
- Power in the market
- Differentiation of products
- Differences in prices
- A lot of durable things and experienced goods
- What are secondary markets, and how do they connect to the main markets?
- Getting together
- Signing off
- Taking over and merging
- Antitrust and business
- Policy on industry
- Policy and Organization in the Workplace
Several groups encourage research and teamwork in the field of industrial organization. The IOS is one of these groups. It was started by Stanley Boyle and Willard Mueller in 1972 to encourage studies on antitrust policy, regulatory policy, competition, and market power in fundamental global markets. It is the IOS’s job to publish the review of IO. Since 2003, the IOS and Northeastern University have put on the International Industrial Organization Conference every year.
An excellent example of an industrial organization
As we discussed earlier, industrial organization is the study of businesses and finding answers about how they grow.
Take the smartphone business as an example; for the average consumer, Apple Inc. (AAPL) was the first company to make smartphones that looked good and had a lot of valuable features. But the price—$499 for 4GB and $599 for 8GB—was too high for them to afford. The Cupertino company worked with network providers to spread the cost of smartphones over time so that they would be widely used without cutting into their profit margins.
Apple was making more and more money until Google and Samsung came along. They exploited people’s desire for smartphones by offering cheaper models with the same features. Competition was good for the industry, and the device’s market grew outside the US over time. The big markets in both rich and developing countries are included. There are also a lot more smartphone makers than ever before.
There are a lot of questions that come up after reading this pretty simple account of how the smartphone business has grown.
These are some:
- Why do Apple phones cost so much?
- What new things did Samsung and Google do to the way phones are made that made them cheaper?
- What made network providers agree to work with smartphone makers, and why did they do it?
- How did Apple try to protect its business, and why did it fail?
- What kind of rules helped the smartphone business do well?
Industrial organizations look into and try to answer these kinds of questions.
Conclusion
- Industrial organization studies the operational and non-operational factors that impact a company’s overall plan and determines the placement of its products in the market.
- It looks at how market power, product differentiation, and industrial strategy affect a business’s operations.
