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The Power and the Limits of Industrial Organization

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Abstract

In the last few decades, mainstream industrial organization has developed very powerful tools for analyzing firm behavior within a fairly narrow framework. In this essay, I argue that while these tools are important, their development has crowded out other important aspects of firm behavior from the mainstream of IO. I conclude that in order to continue to grow the power of IO to predict firm behavior, the field will need to embrace aspects of firms that have moved away from IO in recent years, including innovation, boundaries of the firm, regulation, managerial incentives and decision biases, and others.

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Notes

  1. This essay is based on my Keynote Address at the 13th Annual International Industrial Organization Conference, Boston, MA, April 25, 2015.

  2. The paper, Borenstein and Bushnell (1999), was first presented at a conference in March 1997, a year before the deregulated California market opened. An earlier paper, Borenstein et al. (1996), laid out the theoretical application of a Cournot equilibrium analysis to electricity markets.

  3. See Borenstein et al. (2002), Joskow and Kahn (2002) and Puller (2007). For opposing views, see Harvey and Hogan (2001) and Sweeney (2002).

  4. And any economist who has become a Dean.

  5. See Borenstein and Kellogg (2014).

  6. IO reasoning does suggest the reverse causality explanation: that cost reductions in fracking during 2015 were the cause of continued crude oil price declines. But those same tools suggest looking at production quantity data, which don't really support that hypothesis.

  7. See Grubb (2015) and the other articles in that issue of the RIO.

  8. See Malmendier and Tate (2015) on overconfidence, Murphy (2013) on incentive-distorting compensation.

References

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Acknowledgments

I thank innumerable colleagues who have shaped my thinking about industrial organization without suggesting that any of them agree with the opinions I have expressed in this essay. I’m especially grateful for hours of valuable discussions with Jim Bushnell, Joe Farrell, Ryan Kellogg, Chris Knittel, Nancy Rose, and Carl Shapiro. I have no conflicts of interest that relate to this research.

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Authors and Affiliations

  1. Haas School of Business, University of California, Berkeley, 545 Student Services #1900, Berkeley, CA, 94720-1900, USA

    Severin Borenstein

  2. National Bureau of Economic Research, Cambridge, MA, USA

    Severin Borenstein

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  1. Severin Borenstein
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Correspondence to Severin Borenstein.

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Borenstein, S. The Power and the Limits of Industrial Organization. Rev Ind Organ 48, 241–246 (2016). https://doi.org/10.1007/s11151-016-9508-1

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