In economics , industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets . Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs , limited information , and barriers to entry of new firms that may be associated with imperfect competition . It analyzes determinants of firm and market organization and behavior on a continuum between competition and monopoly , including from government actions.
10-440: There are different approaches to the subject. One approach is descriptive in providing an overview of industrial organization, such as measures of competition and the size- concentration of firms in an industry. A second approach uses microeconomic models to explain internal firm organization and market strategy, which includes internal research and development along with issues of internal reorganization and renewal. A third aspect
20-524: A given industry. A concentration ratio (CR) is the sum of the percentage market shares of (a pre-specified number of) the largest firms in an industry. An n -firm concentration ratio is a common measure of market structure and shows the combined market share of the n largest firms in the market. For example, if n = 5, CR 5 defines the combined market share of the five largest firms in an industry. Competition economists and competition authorities typically employ concentration ratios (CR n ) and
30-880: A separate field owes much to Edward Chamberlin , Joan Robinson , Edward S. Mason , J. M. Clark , Joe S. Bain and Paolo Sylos Labini , among others. The Journal of Economic Literature (JEL) classification codes are one way of representing the range of economics subjects and subareas. There, Industrial Organization, one of 20 primary categories, has 9 secondary categories, each with multiple tertiary categories. The secondary categories are listed below with corresponding available article-preview links of The New Palgrave Dictionary of Economics Online and footnotes to their respective JEL-tertiary categories and associated New-Palgrave links. The common market structures studied in this field are: perfect competition , monopolistic competition , duopoly , oligopoly , oligopsony , monopoly and monopsony . Industrial organization investigates
40-518: A simplistic, single parameter statistic. They can be used to quantify market concentration in a given industry in a relevant and succinct manner, but do not capture all available information about the distribution of market shares. In particular, the definition of the concentration ratio does not use the market shares of all the firms in the industry and does not account for the distribution of firm size. Also, it does not provide much detail about competitiveness of an industry. The following example exposes
50-581: Is oriented to public policy related to economic regulation , antitrust law , and, more generally, the economic governance of law in defining property rights, enforcing contracts, and providing organizational infrastructure . The extensive use of game theory in industrial economics has led to the export of this tool to other branches of microeconomics , such as behavioral economics and corporate finance . Industrial organization has also had significant practical impacts on antitrust law and competition policy . The development of industrial organization as
60-574: The Herfindahl-Hirschman Index (HHI) as measures of market concentration. The concentration ratio is calculated as follows: CR n = C 1 + C 2 + ⋯ + C n = ∑ i = 1 n C i {\displaystyle {\text{CR}}_{n}=C_{1}+C_{2}+\cdots +C_{n}=\sum \limits _{i=1}^{n}C_{i}} where C i {\displaystyle C_{i}} defines
70-424: The aforementioned shortfalls of the concentration ratio. The table below shows the market shares of the largest firms in two different industries (Industry A and Industry B). Aside from the tabulated market shares for Industry A and Industry B, both industries are the same in terms of the number of firms operating in the industry and their respective market shares. In this example, in both cases, all other firms have
80-406: The extent of largest firms' market shares in a given industry. Specifically, a concentration ratio close to 0% denotes a low concentration industry, and a concentration ratio near 100% shows that an industry has high concentration. Concentration ratios range from 0%–100%. Concentration levels are explained as follows: Concentration ratios can readily be calculated from industry data, but they are
90-506: The market share of the i {\displaystyle i} th largest firm in an industry as a percentage of total industry market share, and n {\displaystyle n} defines the number of firms included in the concentration ratio calculation. The CR 4 {\displaystyle {\text{CR}}_{4}} and CR 8 {\displaystyle {\text{CR}}_{8}} concentration ratios are commonly used. Concentration ratios show
100-730: The outcomes of these market structures in environments with A 2009 book Pioneers of Industrial Organization traces the development of the field from Adam Smith to recent times and includes dozens of short biographies of major figures in Europe and North America who contributed to the growth and development of the discipline. Other reviews by publication year and earliest available cited works those in 1970/1937, 1972/1933, 1974, 1987/1937-1956 (3 cites), 1968–9 (7 cites), 2009/c. 1900, and 2010/1951. Concentration ratio In economics , concentration ratios are used to quantify market concentration and are based on companies' market shares in
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