Introduction

Industrial economics is a distinctive branch of economics which deals with the economic
problems of firms and industries, and their relationship with society. In economic literature it is
known by several names with marginal differences such as Economics of Industries Industry
and Trade Industrial Organization and Policy Commerce and Business Economics etc. The
name Industrial Economics was adopted in the early fifties perhaps through the writings of
P.W.S. Andrews. Although this name is becoming popular day by day some authors particularly
in the American circle, prefer Industrial Organization as a title of the subject. At present there is
no clear-cut consensus on the name of the subject.
There are two broad elements of industrial economics. The first one, known as the descriptive
element, is concerned with the information content of the subject. It aims at providing the
industrialist or businessman with a survey of the industrial and commercial organizations of his
own country and of the other countries with which he might come in contact. It would give him
full information regarding the natural resources, industrial climate in the country, situation of the
infrastructure including lines of traffic, supplies of factors of production, trade and commercial
policies of the governments and the degree of competition in the business in which he operates.
In short, it deals with the information about the competitors, natural resources and factors of
production and government rules and regulations related to the concerned industry. The second
element of the subject is concerned with the business policy and decision-making. This is the
analytical part dealing with topics such as market analysis, pricing, choice of techniques,
location of plant, investment planning, hiring and firing of labour, financial decisions, product
diversification and so on. It is a vital part of the subject and much of the received theory of
industrial economics is concerned with this. However, this does not mean that the first element,
i.e. descriptive industrial economics, is less important. The two elements are interdependent,
since without adequate information no one can take proper decision about any aspect of
business.
To view industrial economics as a development of microeconomics is quite understandable.
Both are concerned with the economic aspects of firms and industries seeking to analyse their
behaviour and draw normative implications. However, there are some differences between the
two. Microeconomics is a formal, deductive and abstract discipline. Industrial economics on the
other hand is less formal, more inductive in nature. Microeconomics by and large assumes profit
maximization as the goal of the firm and tells us to maximize it subject to given constraints. It is
passive in approach. Industrial economics does not believe in single goal of profit maximization.
It searches the goals of the firm from the revealed facts. It concentrates on the constraints which
impede the achievement of the goals and tries to remove them. It is an active discipline in this
sense. Microeconomics, being abstract, does not go into operational details of production,
distribution and other aspects of the firms and industries. Industrial economics does go into the
depth of such details. Further, the conclusions derived from the microeconomics may not be
testable empirically and therefore we may not assess their predictive efficiency.

Framework In Industrial Economics:

The SCP paradigm assumes that the market structure determines the conduct of the organization.
This conduct, in turn, is the determinant of market performance. Examples of market performance
include efficiency, profitability and growth. The framework seeks to establish that certain structures
of the industry can lead to certain kinds of conduct or behaviour which then leads to various types of
economic performance. The SCP paradigm was developed through evaluation of empirical studies
involving American industries. Theoretical models were not used to support the paradigm. The
conclusion that was drawn from empirical studies was that market structure determined performance.
This is caused by the belief that the laws of competition should not be based on behavioural models
but rather on structural remedies. According to J.S. Bain who developed the paradigm in the 1950s,
most industries became concentrated than necessary (Ferguson & Ferguson, 1994). In concentrated
industries, there are high barriers to entry. New firms cannot enter these markets that easily.
The SCP approach has been subjected to criticism in the recent years. Some critics say that the
relationships between structure, conduct and performance are more complicated than originally
thought (Ferguson & Ferguson, 1994). Attempts are being made to link the framework back to the
neoclassical theory. However, industrial organizations still use the SCP approach for analysis and as a
tool in policy formulation. The SCP paradigm remains to be a basic tool used by industrial
organizations in competition analysis.
Structure is defined as the components and characteristics of the various markets and industries in an
economy. Structure also involves the different sectors of the economy. In the SCP approach, structure
is described as the characteristics and relevance of individual markets operating within the economy
(Papatheodorou, 2006). It provides a description of the environment in which organizations operate
within a specific market. The said structure can be identified by considering the size and number of
buyers and sellers in the market. The structure can also be identified based on product differentiation,
market barriers and the extent of integration or diversification of firms.
Conduct in the SCP approach involves all actions and behaviour of organizations regarding the
decisions being taken and the reasons behind them. Conduct focuses on how organizations set prices.
Organizations will have to determine whether these prices are in collusion with other firms in the
market (Perloff et. al., 2007). Industrial economists are concerned with the performance of
organizations. Firms should be able to identify whether their activities and operations will improve
economic welfare. Firms should also satisfy and meet customer demands within a specific period.
The SCP approach helps organizations analyse whether their processes and products are produced
efficiently. Organizations should determine whether the allocation of resources is efficient and
effective. The right approach is not to waste resources and produce the right products in just the right
quantities. Firms should also look at the other aspects of performance like the relationship between
price and cost of product as well as the profits earned (De Jong & Shepherd, 2007).
In the current market, consumer tastes do not change that much. Producers and consumers are said to
be perfectly informed. Because of the market conditions, the economic welfare can be maximized
using the Pareto analysis in which marginal conditions are expected to be fulfilled. Under marginal
conditions, firms are expected to set prices so that they will be equivalent to marginal cost. Using the
neoclassical perfect competition model, firms can maximize their profits by ensuring that price will
equal marginal cost. This will result in an effective combination of price and output (Ferguson &
Ferguson, 1994).
The SCP approach states that performance should be determined by the conduct of organizations.
This conduct is then determined by the characteristics of market structures. The relationships
between structure, conduct and performance will then