What Is Industrial Organization?
Let me explain industrial organization to you—it's a field in economics that deals with how firms behave strategically, along with regulatory and antitrust policies, and the overall competition in markets. We apply economic price theory directly to industries. As economists and academics, we study this to better understand how industries function, how they boost economic welfare, and how governments can improve policies related to them.
When we say 'industrial' here, we're talking about any large-scale business activity, like tourism or agriculture, not just manufacturing. Sometimes you'll hear it called 'industrial economy' too.
Key Takeaways
Industrial organization analyzes the factors—operational or otherwise—that shape a firm's strategy and how it positions its products. It covers areas from market power to product differentiation to industrial policy, all of which influence how a firm operates.
Understanding Industrial Organization
This study builds on the theory of the firm, which includes economic theories that describe why firms exist, how they behave, their structures, and their market relationships. In a 1989 paper, economists Bengt Holmstrom and Jean Tirole asked two key questions: why do firms exist—what need do they fill in society or the economy—and what determines their scale and scope.
These questions form the foundation of industrial organization economics. Primarily, it looks at how markets and industries compete, considering real-world issues like government intervention, transaction costs, barriers to entry, and more. Some see it as a subset of microeconomics, which focuses on markets, but industrial organization stands out by emphasizing market interactions such as price competition, product placement, advertising, and research and development.
More specifically, it's the study of oligopolies—markets dominated by a few big players—that gives this field its core purpose, unlike microeconomics' focus on perfect competition or pure monopolies. According to an MIT white paper, it's easier to show industrial organization through examples than to define it, but they described it as the 'economics of imperfect competition.' This imperfect competition raises questions about why products or organizations succeed or fail, and by examining those factors, industrial organization provides answers.
Industrial Organization Areas of Study
You'll find that industrial organization covers a range of topics. These include market power, where firms control prices or output; product differentiation, how companies make their offerings unique; and price discrimination, charging different prices to different customers. It also looks at durable goods and experience goods, secondary markets and their ties to primary ones, collusion among firms, signaling in markets, mergers and acquisitions, antitrust and competition laws, and broader industrial policy.
Industrial Organization and Policy
There are organizations dedicated to advancing research in this area. For instance, the Industrial Organization Society (IOS), founded in 1972 by Stanley Boyle and Willard Mueller, promotes studies on antitrust, regulation, competition, and market power in actual markets. Their official journal is the Review of Industrial Organization. Since 2003, the IOS, along with Northeastern University, has sponsored an annual International Industrial Organization Conference.
Example of Industrial Organization
As I mentioned, industrial organization analyzes industries to answer questions about their development. Take the smartphone industry as an example. Apple Inc. was the first to produce smartphones with appealing designs and features for everyday consumers, but prices were high—$499 for 4GB and $599 for 8GB. To make them accessible without cutting profits, Apple partnered with network providers to spread the cost over time.
Sales grew until Google and Samsung entered, offering cheaper alternatives with similar features. This competition benefited the industry, expanding the market globally to developed and developing countries, and increasing the number of manufacturers.
This growth story prompts several questions: Why were Apple's phones so expensive? What innovations did Samsung and Google use to lower costs? How did network providers agree to partnerships with manufacturers? How did Apple try to protect its market share, and why didn't it succeed? What regulations helped the industry's success? Industrial organization examines and answers these kinds of questions.
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