Developments in Applied Microeconomics and Their Influence on Industrial Organisation (1950s-1980s)
The development of industrial organisation by Hay and Morris was conducted in harmony with advances in general microeconomics. At Oxford, microeconomics was taught at undergraduate level in Philosophy, Politics and Economics (PPE) and at graduate level in the BPhil in Engineering Science and Economics and in the BPhil in Economics.
The first microeconomics lecture addressed to PPE students was introduced as late as 1968 and was taught by Peter Oppenheimer. Before then, studies of firms’ behaviour were encapsulated in the “Theory of the Firm”, “Structures of Industry”, “Industrial Organisation”, “Theory of Prices”, “Welfare Economics” and the “Theory of Demand”.[21] From 1968, microeconomic theory was taught by Oppenheimer and George Richardson to PPE students; by Christopher Allsopp, Nicholas Dimsdale and Laurie Baragwanath to BPhil students in Engineering Science and Economics; and by Richardson, James Mirrlees, Max Corden and occasionally by John Hicks to BPhil students in Economics.[22] The first lectures in the theory of games were introduced in the Hilary term of 1954. This increasing amount of teaching of microeconomics, applied microeconomics and game theory confirms the new orientation taken by industrial organisation, suggested by the successive editions of Hay and Morris’s textbook, andreflected a general tendency in the mid-1970s and early 1980s towards developing more deductive and normative approaches in the discipline.
When Andrews and Brunner left Oxford in 1968, David Stout was left in charge of the BPhil seminar on industrial economics before he, in turn, left Oxford in the early 1970s. Derek Morris then became its organiser and pushed the seminar in a different direction. For instance, in 1974 the seven weeks of the first term were structured as follows:
1. The principles and significance of company accounts
2.
The profit-maximising hypothesis3. Price formation
4. Game theory and oligopoly
5. Mergers and concentration
6. The organisational structure of the modern corporation
7. Multinational corporations
A closer look at the reading lists for each topic shows that Week 2 includes references to Berle and Means (1932), Marris (1964) and Williamson (1964), as contributions to the extension of the profit-maximising hypothesis without referring at all to Hall and Hitch or to any work made by the OERG at Oxford. It has been argued elsewhere that Marris and Williamson developed approaches to the firm supported by concepts of optimum and equilibrium, far from Andrews' interpretation of industrial economics (see Arena 2004).
As a comparison with the first-term topics examined by the seminar, the programme for the Michaelmas term of 1957 was concerned with industrial economics as defined by Andrews:
1. Profits in accountancy and in economic theory
2. Empirical cost functions and their theoretical implications
3. Competition and the conditions of entry
4. Competition and the structure of markets
5. The growth of the firm and the concentration of industry
6. Oligopolies
This Oxford orientation could be contextualised within a broader picture. The introduction of the theory of contestable markets by Baumol et al. (1982) was indeed considered a generalisation of the theory of perfectly competitive markets in which the determination of industry structure was made endogenous. According to Baumol, ‘in the limiting case of perfect contestability, oligopolistic structure and behaviour are freed entirely from their previous dependence on the conjectural variations of incumbents and, instead, these are generally determined uniquely... by the pressures of potential competition’ (Baumol 1982: 2; italics in original).
The concept of “potential competition” that is central to the theory of contestable markets had already been referred to by Marshall and Walras before it was systematised by Baumol and his colleagues as the key to their theory of industrial structures.
The new research programme in industrial organisation also highlighted the need to understand economics not only as the production of theoretical knowledge but also as policy. The formulation of a competition policy as needing to maintain the threat of potential competitors in order to ensure the efficiency of new entries/exits contrasted with the structureconduct-performance paradigm which was clearly more concerned with the stabilisation of structures through insiders’ behaviour. This new line of reasoning enlarged the validity conditions of theories of perfectly competitive markets questioned by some industrial economists, especially with the introduction of multi-product firms based on differentiation.In addition, new models of strategic interaction were also seen as an alternative to standard microeconomics and as a contribution to industrial organisation, as shown in Hay and Morris (1991). Price strategies were now studied in the context of duopolies and oligopolies with the help of emerging modelling techniques. These issues in strategic interaction—developed with an intensive use of game theory—corresponded to a new and substantial methodological element in industrial organisation.
The theoretical and empirical orientation taken by the Journal of Industrial Economics after Brunner had left the editorial board was also indicative of the increasing interest in applied microeconomics and game theory. In particular, when Hay took over the editorship, he made a specific effort to align the Journal’s aims and objectives with research in game theory. He was convinced that such a reorientation was the only strategy that would help to keep the Journal successful within the academic community.[23] As a result, the issues published from the beginning of the 1980s became increasingly formalised and less and less empirical in Andrews’ initial sense of industrial economics.
6