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2012 | OriginalPaper | Chapter

1. Introduction

Authors : Victor J. Tremblay, Carol Horton Tremblay

Published in: New Perspectives on Industrial Organization

Publisher: Springer New York

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Abstract

The field of industrial organization encompasses a host of intriguing questions. Why do cell phone companies charge a fixed fee for a given number of minutes and a high price for each additional minute? Why do firms produce a vast number of brands? If advertising persuades consumers to buy something, are they better off? If two large firms merge, is society better or worse off? What if one of the firms is failing? These are just a few of the questions that are addressed in the book.

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next chapter Demand, Technology, and the Theory of the Firm

Schmalensee (1988) provides an excellent overview of the field.

This is consistent with his earlier work where Leamer (1996) argued that to do good research in economics, we must do three things. First, we must address relevant policy and scientific questions. Second, we need to develop theories that shed light on the question and help organize the data analysis. Finally, we need to use data that are consistent with theory and help answer the question at hand. See Varian (1997) for a discussion of the social value of economic theory.

For a discussion of monopoly theory prior to Adam Smith, see De Roover (1951).

For a discussion of the similarities and differences in their models, see Bellant (2004).

In addition, von Stackelberg (1934) developed a dynamic version of the Cournot model.

This can be seen in Bowley’s (1924) “conjectural variation” model of oligopoly that is summarized in Hicks (1935).

This conclusion was later questioned by Stigler and Kindahl (1973) and Carlton (1979, 1986).

Discussion of the evolution of the structure–conduct–performance paradigm borrows from Grether (1970) and Phillips and Stevenson (1974). A paradigm refers to a theoretical or accepted framework within a discipline at a given time.

The classic work on the efficiency–equity trade-off is Okun (1975, 120), who said that “the conflict between equity and economic efficiency is inescapable.” We will see in Chap. 19 that this is more of a trade-off between efficiency and equality than efficiency and equity. For a less pessimistic view, see Blank (2002).

For a review of 46 studies that used data from 1936 to 1970, see Weiss (1974). For more recent reviews, see Schmalensee (1989), Scherer and Ross (1990), Carlton and Perloff (2005), Waldman and Jensen (2006), and Perloff et al. (2007).

The Chicago School is associated with the Department of Economics at the University of Chicago. However, not all members of the department adhere to the tenets of the Chicago School, and not all Chicago economists are at the University of Chicago. Leading Chicago economists include Milton Friedman, George Stigler, and Gary Becker, all Nobel Prize winners. For a more complete discussion of the Chicago School and its critics, see Reder (1982), Van Overtveldt (2007), Pitofsky (2008), Crane (2009), and Wright (2009).

According to Reder (1982, 12), when dealing with an applied problem Chicago School economists “have a strong tendency to assume that, in the absence of sufficient evidence to the contrary, one may treat observed prices and quantities as good approximations to their long-run competitive equilibrium values.”

The Austrian School is more closely associated with a faith in free markets and limited government. Like Chicago, it places greater emphasis on dynamic efficiency, but unlike Chicago it has less faith in mathematical modeling and empirical analysis. For more information about the Austrian School, see The Ludwig von Mises Institute at http://mises.org.etexts.austrian.asp.

Regarding monopoly power, for example, Demsetz (in Goldschmidt et al. 1974, 238) states that “If we could surgically cut out this monopoly power without bearing the costs of frequently penalizing efficiency and competition, I would say, ‘I am for it.’ I just don’t believe it is possible to do that. The costs of trying would greatly exceed the potential benefits.”

The great recession or financial crisis of 2008–2009 has led to greater scrutiny of the market system and of the Chicago position. For instance, a recent series of papers in Pitofsky (2008) presents evidence that the Chicago School “overshot the mark” in the area of antitrust. Furthermore, Posner (2009), a Chicago economist and legal scholar, argues uncharacteristically that the recent crisis is due to insufficient government involvement in financial markets.

For a review of these criticisms and the evidence, see Stigler (1968), Goldschmidt et al. (1974), and Scherer (1980, Chap. 9).

Others who have expressed similar views include Brozen (1971) and McGee (1971). Alternatively, Mancke (1974) argued that this strategic advantage can be driven by luck rather than superiority.

For example, in his overview of the field, Schmalensee (1988) gave little attention to the SCP paradigm. In addition, in a 1996 survey of industrial organization economics, Aiginger et al. (1998) found that those surveyed did not expect the SCP paradigm to be revived. Caves (2007) provides a less pessimistic view, however.

This won him the Nobel Prize in economics. You may know John Nash from the Russell Crowe movie, A Beautiful Mind. In true Hollywood fashion, in the movie Nash gains inspiration for his contribution to game theory from a bar scene where he and his friends discuss their strategy for meeting women. In reality, his idea came to him in an economics class in international trade. For a more accurate picture of Nash’s life, see Nasar (1998). Nash won the Nobel Prize in 1994, along with two other game theorists, John Harsayni and Reinhard Selten, who refined the Nash equilibrium concept to solve games with imperfect information and dynamic settings.

We have purposefully avoided the debate about whether a model should be judged by the realism of its assumptions or the accuracy of its predictions. We may choose a simplifying assumption in order to build a model that is tractable but would want to avoid assumptions that are clearly false. Differing positions can be found in Friedman (1953) and Nagel (1963). For a discussion of the debate, see Boland (1979) and Martin (2007a, b).

For a discussion of the use of structural methods in industrial organization, see Nevo and Whinston (2010).

Frequently, there are many equally effective policies. In that case, we would select the lowest cost policy.

A third policy would be for the government to nationalize an industry to form a public enterprise. Although this is how we operate the postal, water, and sewer services, it is less common and is not addressed here.

Our discussion of the distinction between a theory and a model borrows from Leijonhufvud (1997), Morgon (2002), Sutton (2002), and Goldfarb and Ratner (2008).

For example, Stigler (1949, 319) states that “… the role of description is to particularize, while the role of theory is to generalize—to disregard an infinite number of differences and capture the important common element in different phenomena.”

Even though mathematics is difficult for most of us, according to Weintraub (2002) the use of mathematics in economics is the most important development in the field of economics in the twentieth century.

For discussion of the relationship between industrial organization and macro stability, especially as it applies to administered or sticky prices, see Carlton (1979, 1986) and Scherer and Ross (1990).

This also involves publishing the results and retesting hypotheses to assure their validity. For further discussion, see Wilson (1952).

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Title: Introduction
Authors: Victor J. Tremblay
Carol Horton Tremblay
Publisher: Springer New York
Book: New Perspectives on Industrial Organization
Print ISBN: 978-1-4614-3240-1

Electronic ISBN: 978-1-4614-3241-8

Copyright Year: 2012
DOI: https://doi.org/10.1007/978-1-4614-3241-8_1