Introduction to Industrial Organization

by Luís M.B. Cabral

This book provides an issue-driven introduction to industrial organization. Over the past twenty years, the study of industrial organization--the analysis of imperfectly competitive markets--has grown from a niche area of microeconomics to a key component of economics and of related disciplines such as finance, strategy, and marketing. This book provides an issue-driven introduction to industrial organization. It includes a vast array of examples, from both within and outside the United States. While formal in its approach, the book is written in a way that requires only basic mathematical training. Supplemental materials posted on the Web make more extensive use of algebra and calculus.

Genres: Economics, Nonfiction, Business, Textbooks

368 pages, Hardcover

First published August 21, 2000

Reviews

[Marcelo Bahia · Rating 5 out of 5]

Is it just me or everybody else sometimes misses college and reading textbooks again, just for the sake of variety after so many pop science books all the time? Ok, ok... it’s just me then. Sadistic or not, I picked up this one once again, after more than a decade of dusting on the bookshelf. That’s the kind of thing Brazilian Carnival does to me: even a microeconomics textbook is better than some of the weird things happening in Rio during this time of the year.

This is an excellent graduate-level book that can be read by anyone with basic mathematical training, or not even that if you are ok in skipping a few equations and shooting just for the qualitative aspects of each chapter. Economists and wannabe economists should enjoy it, as it starts with basic microeconomics - including some supply, demand, marginal revenues and marginal costs curves extravaganza - and game theory, which are followed by an extensive journey into the different ways firms compete in the market. Each market structure has its own chapter, like monopoly, duopoly and perfect competition, and its own examples from real life, helping the reader understand how theory actually fits into the world we live in. It dives on the most important decisions firms face while in the search for the Holy Grail of market power maximization (in Economics, market power has this unsexy definition of being able to raise prices above marginal costs), which means plenty of analysis on decisions related to verticalization, marketing, R&D, product differentiation, price discrimination, among other things that make economists and businessmen super excited. In a world where everybody has a (sometimes superficial) opinion on everything, it’s healthy to do some back-to-basics and read a solid piece like this one. Very recommended book.

[Theo · Rating 5 out of 5]

Very straightforward and brief exposition of industrial organisation. Unlike many other works on the topic (e.g., Tirole), which have the reader spend more time trying to understand the mathematics than the economic intuition, this book makes for a light and informative read (the level of mathematics is roughly comparable to that of Varian's intermediate microeconomics). It includes a variety of illustrative examples and comes with an online supplement with even more applications and teaching notes. The website also includes a list of typos, which should be consulted before/while reading the book--I spent a considerable amount of time trying to understand an issue that turned out to be confused by a typo. Occasionally, it is too brief and readers should not exclusively rely on it, but such is the nature of introductory textbooks.

Overall, it does what it is supposed to do well and serves as a useful starting point before progressing on to more advanced works (Tirole, Carlton, etc.).

[Kevin Vejrup · Rating 3 out of 5]

The book is very informative, and provides plenty of enlightening examples. I believe it has factual mistakes (i.e. figure 4.4), and he tend to neglect crucial assumptions when applying theoretical outcomes to practical scenarios. Ch. 1 defines industrial organization as the way firms compete with each other. Central questions are whether there is market power, how to acquire and maintain it, what the implications of it are, and whether public intervention is required. Market power implies a transfer from consumers to firms, and is also an inefficiency of resource allocations, as it affects consumer behavior. Chicago school refutes market power due to new entrants, and Austrian school favors market power for technological progress. Ch. 2 is about basic microeconomics, such as consumer surplus, demand elasticity, costs, profit maximization and efficiencies. Allocative efficiency requires the appropriate level of output, productive efficiency requires the least expensive production and dynamic efficiency refers to the improvement over time. Ch. 3 discusses deviations of firms to maximize profits, the boundaries of the firm and why firms perform differently. Ch. 4 is an introduction to game theory. Ch. 5 investigates monopolies. It separates the concepts of market share and market power, where the latter relies on low demand elasticity. It extensively discusses the possibilities of regulating monopolies to achieve allocative efficiency. Ch. 6 introduces perfect competition, where the firm is a price taker and only determines its output to where price equals MC. By relaxing assumptions, we obtain the more realistic market competition of competitive selection. By further allowing for product heterogeneity, we have monopolistic competition, causing firms no longer to be price takers. Ch. 7 is about oligopoly competition. Bertrand competition assumes price competition, and leads to p=MC, unless accounting for product differentiation, dynamic competition or capacity constraints. In the Cournot model, firms compete in output. The optimal output is found by deriving the firms’ best response functions (or reaction functions), and results in equilibrium between monopoly and perfect competition. Changes in MC alter best response functions, approaching either monopoly or perfect competition. The equilibrium in the Cournot model, would also prevail in a dynamic game. Ch. 8 is about collusion, and explains the grim strategy where firms collude, given a sufficiently high discount factor. The discount factor is a function of frequency of interaction, the probability of continuation of the firm and growth of the industry. The chapter further states reasons why collusion is rare, and causes of price wars even in the case of collusion. Collusions are more prone to happen when the industry has few and similar firms, which compete in more than one market. Openness can facilitate collusion by revealing the strategy of firms. Ch. 9 shows that not a large number of firms in Cournot competition, cause equilibrium approach perfect competition. It measures market power by the Lerner index and market concentration by the Herfindahl index. Furthermore, he introduces the structure-conduct-performance paradigm (SCP), and discusses relations and reverse causalities. The collusion hypothesis is that concentration cause market power through increased collusion, while the efficiency hypothesis (Chicago School) is to have increased market power based on improved productive efficiency. He finally summarizes that the degree of market power depends on demand elasticity, market concentration and collusive behavior. Ch. 10 is about price discrimination, which requires the absence of resale. Third-degree price discrimination is based on observable buyer characteristics (market segmentation by geography or groups), while second-degree price discrimination is where buyers self-select among different product offerings. Versioning can be selling damaged goods at lower price, to reach more buyers without lowering price for some. Bundling and timing of durable goods are other possibilities of price discrimination. Ch. 11 deals with relations between two firms in sequence along the value chain. The double marginalization problem can cause lower profits than if the firms were integrated, but this can be mitigated by a two-part tariff (a nonlinear contract). Ch. 12 deals with product differentiation, namely horizontal differentiation, where consumers differ in taste, and vertical differentiation, where consumers rank products identically. By the Hotelling model, he illustrates that high degree of product differentiation, results in high degree of market power. Ch. 13 divides advertising into informative and persuasive, and discusses several relations of market power and advertising. Ch. 14 discusses entry and exit, and relates it to economies of scale, etc. Ch. 15 introduces strategic behavior to the entry and exit options. He discusses possibilities of predatory behavior and the effect of mergers and acquisitions, based on questionable assumptions. Ch. 16 investigates how market structure affects R&D. Incumbents and entrants differ in incentives for R&D depending on whether we expect gradual or drastic innovations. Poor sport analogy of risk choice. Ch. 17 deals with basic network externalities.

[Ian · Rating 5 out of 5]

I read the 2nd edition. Very good introduction. Clear to anyone with some mathematical background. Only downside in my opinion was the way graphs were used. For some reason I found them harder to read than in other textbooks. The explanations themselves are very good however.

[Safia Abdurahman]

industry organisation

[Catello Somma · Rating 4 out of 5]

Bello