The Industrial Organization Model

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Presentation transcript:

The Industrial Organization Model This model, pioneered by Edward.H. Mason and Joe. Bain, provides a useful conceptual framework for analyzing the structure of real world markets.

For example, suppose we want to compare the structure of the pharmaceutical industry to the farm equipment industry. The industrial organization model gives us the tools to carry out this task.

The I. O. Model Market Structure Market Conduct Market Performance Government Policy

Key aspects of market structure Number and size distribution of sellers Number and size distribution of buyers Degree of product homogeneity or heterogeneity Importance of economies of scale Barriers to entry

Aspects of market conduct Pricing strategies Product development strategies Advertising and promotion strategies Means of coordination and cross-adaptation of price, product, and sales promotion policies among competing sellers Legal tactics

Aspects of market performance Relationship between price and marginal cost (Allocative efficiency) Technical efficiency Dynamic efficiency X-inefficiency

Recall this market type from principles of micro Pure competition Recall this market type from principles of micro Large number of buyers Large number of sellers Homogeneous product Potential entrants suffer no disadvantages vis à vis established sellers

By contrast, the market for desktop operating software is a far cry from perfect competition. Microsoft dominates this market segment.