Applied Industrial Organization: Towards a Theory Based Empirical Industrial Organization.

• Author: Morris, Clair E.

The conflict between abstract, deductive methodology and that of inductive, empirical approaches to research has never disappeared in the field of Industrial Organization. For more than a decade, however, deductive models employing noncooperative game theory have dominated the literature as scholars have sought to better understand the behavior of firms. This book marks a notable departure from the trend. Its focus is on IO as an empirical science. Fifteen papers investigate firm behavior across a broad cross section of industrialized countries: 13 are focused on European countries (Austria, Germany, and the U.K.), one studies Australian firms, and one looks at the U.S. The common "structure-conduct-performance paradigm" and all it implies is eschewed in favor of an explicit empirical approach. A few papers derive empirical implications from theoretical models, but most start with empirical evidence and construct a theory. The editors have organized the book around three topics: 1. the role of innovation on firm behavior (performance); 2. the evolution of market structure; and 3. the determinants of firm performance.

The only American author in the work, F. M. Scherer, leads off the section on the role of innovations with a study that investigates the effects of innovations on productivity growth in the U.S. economy. After examining the evidence of the 70s and 80s, Scherer cautiously asserts that ... "technological innovation does not appear to have lost its power in driving productivity growth forward" [p. 32]. Geroski and Machin, in looking at the performance of U.K. firms across business cycles, conclude that innovating firms are much less sensitive to cyclical shocks than those firms classified as non-innovating, a result hardly surprising but nevertheless reassuring. Hutschenreiter and Leo, Austrian scholars, look at the empirical evidence from their country on the Schumpeterian hypothesis that relates firm size to innovative activity. They cannot confirm that an increase in firm size leads to a more than proportionate increase in innovative activity. A professor from the U.K., Hey, submits a paper to this section that is a methodological critique of contemporary IO studies rather than being an empirical study itself. Impressed with the contributions of experimental economics, he calls for new types of experiments in Industrial Organization. Hey argues that if new light is to be shed on IO subjects, theory-suggesting experiments rather...