Industry economics suggests that supernormal returns are a function of a firms’ membership in an industry with favorable structural characteristics (e.g. relative bargaining power, barriers to entry, and so on). The unit of analysis is industry.
The major proposition is the SCP model (Industry structure-conduct (strategy)-performance), also called the Bain/Mason paradigm. The essence of this paradigm is that a firm’s performance in the market place depends critically on the characteristics of the industry environment in which it competes. Conduct was the firm’s choice of key decision variables. Industry structure is defined as the relatively stable economic and technical dimensions of an industry that provided the context in which competition occurred, including barriers to entry, product differentiation, overall elasticity of demand (Porter, 1997).
Assumption: In traditional economics, we assume a perfect market, perfect information flow and equilibrium (MR=MC=P), but in industrial organization, markets are not perfect in that the monopoly, oligopoly or duopoly is the real situation. This situation is not good and we need public policies to constrain the monopoly.
The unit of analysis is: business level or one specific industry, not the entire firm. Work of IO has shifted the unit of analysis to both group of firms and the industry, such as the concept of strategic groups, mobility barriers.
Major critiques: 1) It is too static, views the firm as a free-standing entity competing in a single business. 2) IO is too limited, only including a few critical aspects of structure (concentration and entry barriers). 3) The determinism (ignore the power of management) view firm as a black box.
References:
McGAHAN, A. M., & Porter, M. E. 1997. How Much Does Industry Matter, Really? Strategic Management Journal, 18(S1): 15–30.
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