Introduction
The subject matter of industrial economics is the behavior of firms in industries. Industrial economists study the policies of firms toward rivals and toward customers (which includes at least prices, advertising, and research and development). Industrial economists study firms in industries that are competitive, and they study firms in industries that are less than competitive. But this is nothing more or less than the subject matter of microeconomics-specifically, the theory of the firm. At a fundamental level, there is no difference between industrial economics and what is sometimes called price theory.
Beyond this basic level, however, there are differences between microeconomics and industrial economics. Especially at the introductory level, the focus of micro courses is usually on simple market in which structure-competition and monopoly. Here the arguments are straightforward and results come easily. In contrast, the most interesting and important applications of industrial economics concern oligopoly: the type of market in which firms are neither monopolists nor perfect competitors, but sometime in between. By and large, these are the kings of firms and markets that we find in the real world.
There is another factor that distinguishes industrial economics from microeconomics. Industrial economics, in contrast to microeconomics theory, is profoundly and fundamentally concerned with policy questions. These question concern government policy toward business. Government policy toward business includes antitrust policy, regulation, and public ownership of business, but industrial economics has special relevance for antitrust policy. In what sorts of markets, if any, will firms be able to exercise monopoly power-control over price? In what sorts of markets will cartels work, and in what sorts of markets will cartels break down? Can firms act in such a way as to make their environment les competitive? If the answer is yes, can the government do anything about it? Is there a way for government to set the rules for competition that will improve the way markets work?
Anyone who doubts the importance of public policy toward business should contemplate the impact of the organization of Petroleum Exporting Countries (OPEC) on economics around the world after October 1973. Price theory lays the foundation for the analysis of public policy, business behavior, and market performance, but it is in industrial economics that these questions occupy center stage.
