The Industrial Organization Model

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The Industrial Organization Model
This model, pioneered by Edward.H.Mason and Joe.
Bain, provides a usefulconceptual framework for
analyzingthe structure of real world markets.
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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.
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The I. O. Model
Market Structure
Market Conduct
Market Performance
Government Policy
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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

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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

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Aspects of market performance

• Relationship between price and marginal cost
  (Allocative efficiency)
• Technical efficiency
• Dynamic efficiency
• X-inefficiency

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Pure competition
Recall this market type fromprinciples of micro

• Large number of buyers
• Large number of sellers
• Homogeneous product
• Potential entrants suffer no disadvantages vis à
  vis established sellers

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