Industrial economics

from Wikipedia, the free encyclopedia
This article or section needs to be revised. Details should be given on the talk page. Please help to improve it , and then remove this flag.

The Industrial Economics ( English organization industrial or industrial economics ) is an economic approach that deals with the interaction between the market and companies busy. Here are competitive processes considered in all markets. In addition to branches of industry, this also includes all economic sectors . The Industrial Economics uses microeconomic methods and concepts, but differs in focusing on partial analysis and imperfect competition .

Since modern industrial economics , with recourse to mathematical game theory, increasingly deals with the options for action of individual companies, industrial economics has also become increasingly important for business administration , especially strategic management . In addition, it is closely related to competition theory . Industrial economics also provides the scientific basis for competition policy , media economics , organizational theory and marketing .

History of the approach

The preoccupation with markets in which there is only imperfect competition goes back to the 1930s. In the 1950s, it was the economist Joe Bain who, on the basis of extensive empirical studies, was the first to classify the various forms of imperfect competition. He also described rules according to which companies that are established in such imperfect markets can make market access difficult or even deny to new competitors. Bain coined the English name of this branch of research (Industrial Organization) through the publication of a book of the same name. In addition to Bain, the work of Edward Sagendorph Mason , who can also be assigned to the Harvard School , was important.

In the 1960s and 1970s, on the one hand, Bain's concepts were further elaborated; in particular, his concept of market entry barriers was expanded to include exit and mobility barriers. On the other hand, concepts of mathematical game theory have started to be applied to industrial economics in order to better do justice to the mutual dependence of established providers and potential newcomers. Based on the oligopoly models of Antoine Augustin Cournot ( Cournot competition ), Joseph Bertrand ( Bertrand competition ) and Alfred Marshall , the works of Edward Chamberlin and Joan Robinson in the field of monopolistic competition, and the Hotelling's law of Harold Hotelling was the Industrial economics further developed.

At the beginning of the 1980s, the economist Michael E. Porter applied industrial economics, which had hitherto been oriented towards welfare theory, to individual companies and began to investigate the question of what lessons the individual company could draw from the knowledge of industrial economics from a strategic point of view. With this approach he founded one of the most influential schools of strategic management, the market-based view .

Broad approach

Industrial economics deals with the mechanisms that work on markets characterized by provider concentrations and market delimitations. This includes the functional requirements and modes of competitive processes, as well as the competitive and innovation processes as such. The subject is the question of the microeconomic price policy , which is the optimal allocation that can be realized through a functioning competition . The focus is on the market structure-market behavior-market result paradigm , which shows parallels to management research through the analysis of relevant environmental layers: The interplay of organizational ability and environmental conditions ( market structure ) via the strategy ( market behavior ) affects the company result ( market result ).

Industrial economics asks about the influence that the structure (the organization) of an industry (called industry by Bain) or an oligopolistic group within an industry has on the behavior and thus the economic success of the members of the industry or group. Since industrial economics wants to explain the economic success of companies from the market structure, the elaboration of the relevant parameters of the market structure and a subsequent classification of possible market formations is of particular importance for them. Bain differentiates between markets and industries based on three parameters:

  • the degree of provider concentration,
  • the degree of product differentiation and
  • the level of entry barriers in the industry or market.

In industrial economics, studies have been carried out on the relationship between market structure and market result, which particularly endeavors to explain the differences in success in an inter-branch comparison. Parallels between management issues and industrial economics can be seen above all in terms of content and the relevant environmental section. This is how the interplay between organizational skills and the environment (structure) works via strategy (behavior) to corporate success (result). A total of three directions can be distinguished:

  1. Harvard School : As part of the Harvard School approach, represented by Bain , Mason , Clark and Baumol , among others , industries are examined from a descriptive-analytical or action-theoretical perspective, with potential competition being assumed as the main determinant of good performance (market result). In contrast to the Chicago School, it can be perfectly acceptable for representatives of the Harvard School if the market result is achieved through potential competition.
  2. Chicago School : It is represented by, among others, John McGee and George Stigler , who assume that the competition will work if there is enough actual or potential competition. This normative-analytical or welfare-economic approach forms the basis for a preventive antitrust policy and recommendations for unbundling. Together with the Austrian School approach, the Chicago School is fundamentally against intervention by the state. The representatives of the Chicago School criticize the market structure-market behavior-market result paradigm, since individual company successes or above-average profits of individual companies are not due to a lack of competition due to market barriers and concentration, but to the company's capabilities.
  3. (New) Austrian School ( (New) Austrian School ): Austrianism developed mainly in German-speaking countries and is linked to Schumpeter's entrepreneurial concept. He will u. a. represented by Ernst Heuss , Friedrich August von Hayek and Erich Hoppmann . The focus of the Austrian School investigations is primarily on restrictions of competition. Building on this conception of competition theory, competition-oriented strategies have been developed since the beginning of the 1990s, which are known as the “(Neo) Austrian School of Strategy”. These approaches place company resources at the center of strategic considerations and deal with search and selection processes.

Provider concentration

Bain defines industry as subgroups of companies within the economic sectors which, since their products represent strong substitutes in the eyes of potential buyers and (should) appeal to a common group of buyers, are in direct competition with one another. The concentration of providers within an industry, operationalized as the number of competitors and the size of their individual market shares, is considered important by Bain primarily for two reasons: A higher concentration of providers increases the incentive for the individual competitor to cooperate with his competitors together a profit-increasing 'industrial price', which corresponds to a monopoly price or at least can approach it, and to determine corresponding production quantities. At the same time, there is less incentive for individual competitors to use their own competition policy to increase their own market share and profit, which can only be done at the expense of the competitor.

Product differentiation

Bain views product differentiation from the standpoint of the (potential) buyer of a good. The more two goods appear to a buyer to be different, the less one represents a substitute for the other and the lower the cross-price elasticity of the demand for both goods will be. Viewed in this way, product differentiation is closely related to Bain's concept of industry, which is characterized by the fact that the products belonging to an industry represent relatively good substitutes in the eyes of the buyer. In order for product differentiation to exist within an industry, it is therefore necessary that different groups of buyers evaluate different competing products differently. Then, given the same product prices, certain buyers will buy one product, others a competing product and, given different prices, certain buyers will be willing to pay a higher price for a more highly valued product, while persuading others to buy only on the basis of relatively lower prices will be. Given the existence of product differentiation, each supplier has a more or less large price range within which he can vary the price of his product without losing all customers in the event of price increases or price decreases to steal customers from competitors.

Entry barriers

The central element of the market structure analysis of industrial economics are the entry barriers . The concept of entry barriers distinguishes between companies that are already established in an industry and supply the market with their products (established suppliers) and those companies that are not established in the industry, but do so by building a new factory and using their production capacity could try for an offer in the market (potential suppliers). Bain explicitly does not count companies that 'buy into' an industry by acquiring an already existing factory, as this does not change the production capacity of the industry.

The level of an entry barrier refers to the extent to which established providers can in the long term raise their offer prices above the competitive level given by the minimum average costs without stimulating potential providers to enter the industry, the entry barrier price. The fact that, as a rule, neither the group of established providers nor the group of potential providers is homogeneous, Bain takes into account by making another distinction: He differentiates between immediate and general entry conditions. The immediate entry conditions relate to the percentage excess of the offer price over the minimum average cost that the established provider most strongly protected by the entry barriers can charge without causing the entry of the least disadvantaged potential providers. The general entry conditions relate to the sequence of the values ​​of the immediate entry conditions that would arise if the potential providers were to establish themselves one after the other in the industry in the order of increasing disadvantage through the entry barriers.

Three groups of entry barriers are classically named:

  1. Advantages of established providers due to economies of scale,
  2. Advantages due to absolute cost advantages and
  3. Advantages that established providers enjoy due to product differentiation.

Game theory approaches

The modern industrial economic literature (see for example Tirole or Pfähler / Wiese) is mainly an application of non-cooperative game theory to the questions dealt with by Bain. The basic game theory models of industrial economics come from Antoine-Augustin Cournot ( Cournot oligopoly ) and Joseph Bertrand ( Bertrand competition ). These are treated both as level games (one-time action selection) and as repeated games (multiple action selection).

Often one considers two-period models. For example, at the first stage, companies choose a research and development budget that (with certain probabilities) reduces costs. The subsequent volume or price competition is then influenced by the new cost structures. Similarly, design leadership and quality leadership are treated as types of product differentiation as well as promotional activities or compatibility competition.

literature

Older works according to the structure-behavior-results approach :

  • JS Bain: Barries to new competition. Cambridge, MA, 1956.
  • JS Bain: Industrial organization. 2nd Edition. New York 1968.

Textbooks with a game theory approach:

  • Jean Tirole: The Theory of Industrial Organization. Cambridge, MA, 1988, ISBN 0-262-20071-6 .
  • Wilhelm Pfähler, Harald Wiese: Corporate strategies in competition - A game theory analysis. 2nd Edition. Springer Verlag, Heidelberg 2006, ISBN 3-540-28000-6 .

Connection of industrial economics and strategic management:

  • R. Caves, Michael E. Porter: From entry barriers to mobility barriers: Conjectural decisions and contrived deterrence to new competition. In: Quarterly Journal of Economics. 91/1977, pp. 241-261.
  • Michael E. Porter: The contributions of industrial organization to strategic management. In: Academy of Management Review. 6/1981, pp. 609-620.