Luís Cabral - Introduction to Industrial Organization > IIO Home > 1. What is IO? >

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Teaching notes for chapter 1

As the title suggests, the purpose of this chapter is to introduce students to the concept of industrial organization. There are two main parts to this. First, to explain what the term "industrial" means. Much too often, readers assume that industrial organization (or industrial economics) is the study of the industrial sector, as opposed to agriculture or services. In fact, "industry" refers to market or activity sector, as in the insurance industry or the cement industry. A more appropriate name for IO, one that would avoid this confusion, might be "the economics of firms and markets" or "the economics of imperfect competition."

The second step in explaining IO consists of outlining the main issues addressed in IO. There are certainly many ways of organizing and classifying the main issues. The solution adopted in this chapter has the advantage of highlighting:

  1. The double perspective of positive and normative analysis. Positive analysis (how things are) is reflected in the first question (is there market power) and the third one (the implications of market power); normative analysis (how things should be) is reflected in the second question (how firms maintain market power) and the fourth one (what policy makers can do about market power).
  2. The double perspective of the firm and policy makers. The firm's perspective is reflected in the second question (how to sustain market power), whereas the policy maker's is reflected in the fourth question (what to do about market power).

The relative weight given to each question naturally depends on the particular audience of the book. For example, when teaching MBA students the emphasis should be put on the second question, whereas the fourth question is a central one when teaching economics majors.

The example chosen to illustrate some of the concepts in IO (Zantac) is one among many other possible examples. Alternatives include airlines, telecommunications, video games and artificial sweeteners, to name a few (all these are introduced at later stages in the book). Instructors may want to choose an example that they are familiar with. Whichever it is, the important thing is to start off with an example, so that students get the idea that the concepts they are being introduced to are useful to understand particular aspects of the reality of firms and markets.

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