Introduction to Industrial Organization (IO)

 A definition of IO: "Industrial organization is concerned with

the workings of markets and industries, in particular the way
firms compete with each other.“

Aim:
 Develop skills to make more informed decisions and
judgments about issues relating to the industry
 become more efficient in analysing industries by identifying
key issues.

Objectives: To get an improved understanding of static and

dynamic problems faced by firms:
1. internally, organizing production within the firm- The Theory
of the Firm
2. externally, how firms compete in the marketplace - The
Theory of Markets
 Difference between Micro
Economics and Industrial
Economics
The study of the ---do--
decisions of people
and businesses and
the interaction of
those decisions in
markets. The goal of
microeconomics is to
explain the prices and
quantities of
individual goods and
services.
By enlarge it Does not believe in
assumes profit single goal of profit
maximization as goal maximization
of the firm

May shun public Public policy

policy implications if implications are taken
necessary . care off.
Does not go into Does go into depth of
operational details of such details.
production
distribution and other
aspects of firms and
industries
Theory of the firms of Important influences
micro economics from outside have
provides the main given a totally different
theoretical bases for character to Industrial
study of Industrial Economics .in light of
Economics such influences the
conventional theory of
the firms is bound to
 Difference between Macro
Economics and Industrial
Economics
The study of the --do--
national economy and
the global economy
and the way that
economic aggregates
grow and fluctuate.
The goal of
macroeconomics is to
explain average
prices and the total
employment, income,
and production.
Macro Economics Industrial Economics
aims to achieve aims to study
broader policy elements of industrial
objectives through a regulations and how
variety of objectivesthese elements affect
such as the performance of
nationalization, firms is an important
taxes, control on aspect of Industrial
price and output. Economics
Difference between Managerial
Economics and Industrial
Economics
It by an large starts It lays main emphasis
from assumptions thaton understanding and
firms aim explaining the working
to maximize profit of existing system and
and proceeds towards thereby predicting
examining the effects of changes in
manner in which the the variables of the
decisions rules system . It is basically
procedures of the concerned with what
firms should be taken actually is happening
to achieve its goals. around.
It is more It is a basic element in
interdisciplinary in Managerial Economics
nature and includes as it provides
accountancy, knowledge about
operations research, structural constraints
marketing and affecting achievement
psychology which are of management goals.
combined together
with economics for
right managerial
decision making.
 Some basic concepts
 Firm
An organization that uses resources to produce
goods and services. All producers are called
firms, no matter how big they are or what they
produce. Car makers, farmers, banks, and
insurance companies are all firms.

 Government
A many-layered organization that sets laws and
rules, operates a law-enforcement mechanism,
taxes households and firms, and provides public
goods and services such as national defense,
public health, transportation, and education.
 
 Market –
 Any arrangement that enables
buyers and sellers to get
information and to do business
with each other.
 It is defined as “a closely
interrelated group of sellers and
buyers for a commodity”.
The Structure-Conduct-Performance
paradigm

SCP paradigm: Stable causal relationship

between the structure of an industry,
firm conduct and market performance.
 Market structure :
Also known as market form describes
the state of a market with respect to
the competition.
The common Market structure studied
in this field are the following:
 PerfectCompetition
 Monopolistic competition
 Oligopoly
 Monopoly
 Perfect Competition

There are many firms, each selling an identical product.

There are many buyers.
There are no restrictions on entry into the industry.
Firms in the industry have no advantage over potential new
entrants.
Firms and buyers are completely informed about the prices of
the product of each firm in the industry.
Firms in perfect competition are said to be price takers. A
price taker is a firm that cannot influence the price of a good
or service.
 Imperfect Competition

 Monopolistic Oligopoly
Monopoly
competition
 Monopolistic competition
 A market structure in which a large number of
firms compete with each other by making
similar but slightly different products.
 Monopolistically competitive markets have the
following characteristics:
 There are many producers and many
consumers in a given market, and no buisness
has total control over the market price.
 Consumers perceive that there are non-price
differences among the competitors' products.
 There are few barriers to entry and exit.
 Producers have a degree of control over price
 Oligopoly
 A market structure in which a small
number of producers compete with
each other.
 Monopoly -
 An industry that produces a good or service for
which no close substitute exists and in which
there is one supplier that is protected from
competition by a barrier preventing the entry
of new firms.
 FEATURES
 Single producer
 No close substitutes
 Barriers to entry
 Firm and industry
 Market conduct

Meaning :
“ It is defined as the pattern of
behaviour that firms follow in
adopting or adjusting to market in
which they operate to achieve the
well defined goals”.
Elements of market conduct
1. Seller and buyer concentration
Seller concentration means in a certain
industry, the number of active firms is
very limited and these few firms produce a
large part of total supply.
In other words, these firms possess market
power in the sense that they can affect the
market price by making change in the
quantity of product.
2. Market power
 The term used to denote the
degree of monopoly arising out of
various elements of market
structure.
 With the high degree of market
power; the firm will be active
entity in the business
 In the situation of competition,
market power will be negligible.
 3. Product differentiation
 In the perfect competition market all
firms sell same or homogeneous
product.
 But in reality a single product is sold
by different sellers.
 4. Barriers to the entry
 Sellers concentration indicates that
how some firms acquire dominance
in the industry, consequently the
competition between the firms is
lessened .
 The types of such barriers include:
 Cost profit to present firms which is
not available to new firms
 Legal barriers to the entry.
 Market performance
 Market performance means the
evaluation of the derivation of the
behaviour of any industry when it
behaves differently from the
established superior laws of the
market.
 In the position of Perfect
Competition only an industry can
perform well, but when market is
derivated from the condition ,market
behaviour also changes
 The Structure-Conduct-
Performance paradigm
 In micro economics the equilibrium of the
firm and industry is studied .
 On the contrary, Industrial Economics is
more concerned to change in market
structure, resulting in market behavior or
the firm behavior ,which ultimately affects
the Market performance.