Module 2 – Introduction to Industrial Organization:

What is Industrial Organization (IO)?

Specialized Microeconomics: IO is a specific part of microeconomics that zooms in on how companies

behave, how markets are structured, and how they interact.

Overlap with Microeconomics: Similar to microeconomics, it studies how people and companies make
decisions and allocate resources.

Unique Aspects of IO: It focuses more on how companies compete, the nature of markets that aren't
perfectly competitive, and the influence of government rules.

Contribution of IO to Microeconomics:

Understanding Firms and Industries: IO helps us understand how companies and industries work,
which is crucial for understanding bigger economic trends.

Influencing Public Policy: It gives advice to policymakers on how to make markets work better.

Historical Evolution of IO:

 Early Beginnings: IO has roots in classical economics, acknowledging the power of monopolies. It
started taking shape in the late 19th and early 20th centuries.
 SCP Paradigm: In the 1930s, the Structure-Conduct-Performance Paradigm came about,
recognizing that real markets aren't always perfectly competitive.
 Chicago School: In the 1960s and 1970s, scholars challenged established IO ideas, emphasizing
market efficiency and self-correction.
 Game Theory and Information Economics: In the 1980s and 1990s, game theory and
information economics became crucial in understanding firm behavior.
 Empirical Industrial Organization: Since the late 20th century, empirical research using real-
world data became more important.
 Behavioral Industrial Organization: Recently, behavioral economics ideas were added,
understanding that people don't always make rational choices.
 Current Trends: IO today looks at how technology affects markets, especially in the digital
economy.

Key Themes and Concepts of Industrial Organization:

 Market Structure: How a market is organized, considering the number of companies, product
differences, and barriers to entry.
 Firm Strategy: How companies compete using pricing, advertising, and other strategies.
 Market Conduct: How companies behave in terms of pricing, product choice, and marketing.
 Market Performance: How well markets work, considering efficiency, fairness, and innovation.
  Antitrust and Regulation: Laws and rules that promote competition and control market power.
 Asymmetric Information: When one party has more or better information than the other, leading to
market failures.
 Transaction Costs: The costs involved in making economic exchanges, like searching for information
or negotiating contracts.
 Product Differentiation: How companies make their products different from others.
 Network Effects: How the value of a product increases with the number of users.
 Strategic Barriers to Entry: Tactics companies use to discourage new competition.
 Vertical Relationships: How companies at different stages of production interact.
 Public Policy and Welfare: How market organization affects overall social welfare.

Real-World Application Examples:

Telecommunications Industry in the Philippines: Examining the duopoly of Globe and Smart and how it affects
pricing, service, and innovation.

Retail Industry in the Philippines: Analyzing how SM and Ayala differentiate their offerings and the impact on
market power and consumer behavior.

Local Agricultural Market in the Philippines: Understanding how information disparities between farmers and
buyers affect market conduct and efficiency.

In a nutshell, Industrial Organization dives deep into understanding how companies behave, how markets are
structured, and how these factors influence economic outcomes. It also suggests ways to make markets work better
through policies and remedies.