Recent Developments in Industrial Organization: A Selective Review
Search for the full article on Bing
ARTICLE SUMMARY
This paper summarizes economic theories of the ways firms organize themselves within markets.
POLICY RELEVANCE
Governments can use recent developments in economic theory to design and regulate markets to deliver good results for consumers. Theory can also be used to design auctions used to sell rights to publically-owned goods like radio spectrum and lumber.
KEY TAKEAWAYS
- Game theory is the study of strategic interactions between agents whose actions can affect the outcomes of other players. For example, in a market with only two firms, the firms are playing a game with one another.
- The economic theory of markets is rooted in game theory, and when a government understands structure of a market—how firms can influence prices and supply, for example, or how firms can act to prevent other firms from entering the market—theory might be used to alter that structure to change market outcomes.
- Firms can deter entry by other firms in a variety of ways, and this usually means higher prices for consumers. This can be minimized by policies making market entry easy.
- Auction theory, a subset of game theory focused on auctions, can be used to design auctions to ensure that a good is sold at or near its true value. Google used an auction for its IPO, and spectrum licenses are often allocated by auction.
- Networked industries gain benefits from scale and connections; airlines with spoke-and-hub models, telecommunications networks, and credit card payment systems are examples. Often, good policy should encourage connections between networks.
- Multinational firms can invest in infrastructure in other nations rather than engaging in direct trade; for example, a US chipmaker could build a fabrication facility in India rather than buying from an Indian firm. This allows the firms to exploit organizational advantages.
QUOTE
TAGS
About Guofu Tan
Professor Tan's research focuses on auction theory, industrial organization, competition and regulatory policies, and the Chinese economy. His most recent work is concerned with collusion, entry, and resale in auction markets; competition in international telephone markets; Nash bargaining with non-convexity; platform competition and standardization; and economic analysis of competition policy and the implications for China. In addition to his academic positions, he is currently a senior consultant in Delta Economics Group.
