I was fortunate to study economics at the University of Chicago. Three of my teachers later won Nobel Prizes. My favorite teacher was George Stigler, who won the Nobel for his work on the part of economics called “industrial organization.” This was my major within economics and my main interest. I spent a summer doing a research paper on industrial organization on a grant from the National Science Foundation. And George Stigler wrote one of the great textbooks on it. So what is “industrial organization?”
Industrial organization is the study of the way our industries are organized. Those industries include not only cars and airlines, but also churches, museums, universities, and health care. Is the industry “concentrated” (just a few players) or not? Is it driven by advertising? Has it achieved economies of scale (saving money by making more stuff) or even moved on to diseconomies of scale (which few people ever talk about but is one of the big challenges in America today)? Is the industry a monopoly (one big supplier), a monopsony (one big customer, like the government in defense and aerospace), or highly fragmented and competitive? What are the “barriers to entry” in the industry? Why have mergers taken place or not taken place?
For the most visible industries, the last 100 years have been dominated by oligopoly – dominance of a few: the “big three” automakers, “big eight” accounting firms (in the old days), “big four” airlines, a handful of big tire makers, three TV networks, and on and on.
But over time these structures change. The TV networks’ dominant position has collapsed with the rise of niche cable channels. The old two- or three- newspaper town may soon be the “no-newspaper” town. The power of the big three automakers and the big movie makers has crumbled. The convenience store industry has devolved from a trio of big nearly-nationwide firms to hundreds of local and regional firms.
Topics like monopoly and oligopoly quickly lead to discussions about antitrust and regulation. What is the right level, if any? Should authorities interfere in mergers? Should the government have broken up Microsoft or stopped the acquisition of Wild Oats by Whole Foods Market? Such issues are becoming internationalized, as evidenced by the Europeans stopping the merger of GE and Honeywell (that had been approved by US authorities). Stigler was perhaps best known for his theory of regulation, which I still believe in, but few in Washington seem to have heard of.
I find the study of these dynamics fascinating, and always have. I don’t think you can understand your industry, invest in an industry, work in an industry, sell to an industry, or even understand business at large without thinking about industrial structure.
And yet I am continually amazed at how little Americans – especially businesspeople and politicians – know about industrial organization and how to think about it.
Which brings me back to my favorite book about it, the most readable book about it, the one I started out with in the 1960s: The Structure of American Industry by James Brock (12th edition, Pearson Prentice Hall 2009). If you studied the subject in school, you may remember this book as being by Walter Adams, and later by Adams and Brock, before Adams passed away.
Each edition of this book has covered key US industries of current topical interest and discussed their organization and structure. The 12th edition includes the following industries: agriculture, petroleum, electricity, cigarette, beer, automobile, music recording, telecommunications, airline, banking, health care, public accounting, and college sports. So you can see the book yields insights into consumer industries, heavy industries, manufacturing, services, information industries, for profit and non. These industries have incredibly diverse structures, from a “big three” to a high degree of fragmentation. The book is full of very helpful charts, tables, and graphs. This is all “real world” stuff, not just theory.
No matter what industry you are in, or what industry you want to understand, this book will show you examples that point the way toward understanding. My entire grasp of the business world is in part founded in an old edition of this book. If I ever teach a course of “the foundations of business,” I would likely recommend this book as a text.
[Addendum: The last chapter of the book is not about an industry, it’s an opinion piece by the editor of the book on the role of anti-trust and related regulation in society. I must let you know that I am in near total disagreement with this chapter, which ignores the work of Stigler and others. I have been watching mergers and acquisitions closely for almost 50 years, and have never seen any evidence that a trust-busting move helped consumers or society at large, or that the absence of such an act did any harm.]