Industrial Organization.

• Author: Einav, Liran
• Position: Program Report

Researchers in the Program on Industrial Organization (IO) study consumer and firm behavior, competition, innovation, and government regulation. This report begins with a brief summary of general developments in the last three decades in the range and focus of program members' research, then discusses specific examples of recent work.

When the program was launched in the early 1990s, two developments had profoundly shaped IO research. One was development of game-theoretic models of strategic behavior by firms with market power, summarized in Jean Tirole's classic textbook. (1) The initial wave of research in this vein was focused on applying new insights from economic theory; empirical applications came later. Then came development of econometric methods to estimate demand and supply parameters in imperfectly competitive markets. Founding program members including Timothy Bresnahan, (2) Ariel Pakes, (3) and Robert Porter (4) played a key role in advancing this work.

Underlying both approaches was the idea that individual industries are sufficiently distinct and industry details sufficiently important that one needs to focus on specific markets and industries in order to test specific hypotheses about consumer or firm behavior, or to estimate models that could be used for counterfactual analysis, such as analysis of a merger or regulatory change. The econometric developments in the field, which emphasized structural modeling of demand and supply, ran somewhat counter to the trend in other fields toward the search for natural experiments to illuminate the causal effects of policy changes.

There were, to be sure, some points of overlap with neighboring fields. A notable example was the role that industrial organization economists played in the activities of the NBER's Program on Productivity, Innovation, and Entrepreneurship (PRIE), where the research agenda embraced the estimation of plant-level costs and productivity and the effects of firm and market characteristics on R&D spending and the rate of innovation.

In the last decade, the scope of program members' research has broadened to encompass more industries and new topics. While studies of traditional manufacturing, service, and retail settings remain an important focus, there has been a rapid growth of research on sectors such as health care, (5) education, (6) financial markets, (7) and the media. (8)

Expanding the Scope of Research

A nice way to illustrate the increase in the breadth of IO research is to examine the rate at which IO program members cross-list their papers with other NBER programs. We analyzed all NBER working papers since 1990 on which at least one author was an IO program affiliate, then computed the share of these papers that were cross-listed with another program. We considered only programs in which at least 5 percent of the papers by IO researchers were cross-listed.

Figure 1 plots our findings. It shows an interesting evolution of cross-listing behavior in the last 15 years. While productivity remains a nontrivial focus of work in IO, there has been a remarkable increase in the share of IO papers cross-listed in other fields of applied microeconomics. This started in the early 2000s in the context of environmental regulation and energy--especially electricity--markets, and continued in the last decade with a sharp rise in research on health care markets, insurance markets, labor markets, and on topics that overlap with public economics. While the cross-listing rate with programs other than PRIE was nearly zero in the program's first decade, today nearly 20 percent of IO program papers are cross-listed with Public Economics, 20 percent with Health Care, 15 percent with Environment and Energy Economics, and 10 percent with Labor Studies. We think that two general forces have contributed to this new pattern, which in keeping with the program's emphasis one may label as supply and demand.

On the supply side, econometric methods for studying imperfect completion have matured: From initial "test cases" using retail scanner data to estimate demand and supply for consumer products such as breakfast cereal and other grocery items, these methods increasingly are applied to more complex products such as health insurance, primary schooling, consumer loans, media consumption, and financial products. The explosion of available data from private sector firms and markets has paralleled and facilitated this expansion.

On the...