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ECO 452: INTRODUCTION TO INDUSTRIAL ECONOMICS

INTRODUCTION

Economists have been interested in the economic behaviour and performance of industries since
the beginning of the industrial revolution, but the marking out of a specific area of economics
under the title of industrial economics is a phenomenon of the 20h century. It appears to have
crept into the literature in the early 1950's via the writings of P.W. Andrew.

Before then, economic analysis of industry was not recognized as distinctive branch of
economics in many quarters and where it was, it was given variety of different names, such as
economics of industry, industry and trade, business economics, commerce and industrial
Organization.

The absence, until relatively recently, of any general accepted name for this area of economics is
indicative of a lack of consensus, not only as to the scope of the subject, but also as to its
objectives and methodology.

Most economists would regard industrial economics or industrial organization as being primarily
an elaboration of, and development from one major element in the mainstream of economic
thought, that is, the theory of the firm.

According to Koch (1974), industrial organization is a theoretical and empirical study of how the
structure and conduct of sellers and buyers affect economic performance.

Clarkson & Miller (1982) defined industrial organization as a specialty in economics that helps
to explain why markets are organized as they are and how their organization affects the way
these markets work.

Jeffrey & Roger (2000) defined industrial economics as the study of the operation and
performance of imperfectly competitive markets and the behaviour of firms in the markets.

Howe (1978), define industrial economics as all about economic aspect of industry, of markets
and firms.

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Industrial economics is best defined as the application of microeconomic theory to the analysis
of firms, market and industries. Stigler (1968) argued that industrial economics does not really
exist as a separate discipline, that it is simply differentiated microeconomics.

The theory of the firm comprises the analysis of different market structure, and their implications
for economic welfare. It was generally developed on the basis of profit maximization assumption
and the 1ools of marginalism, though more extended work has shown that neither of this is
essential. To view industrial economics as an offshoot of this is understandable. The theory of the
firm and industrial economics are concerned with the economic aspects of a firm’s behaviour,
seeking to analyze such behaviour and draw normative implications from the analysis. Both have
been concerned with market structures, costs and competition.

However, it must be stressed that the development of industrial economics can partly be seen as a
consequence of several important inadequacies and faults of analysis in the theory of the firm.
Although, the theory of the firm provides the main foundation for the study of industrial
economics, several important influences from outside have given a totally different character to
industrial economics.

METHODOLOGY

The methodology of a discipline refers to the basic approach (es) commonly used in a discipline
in the creation of knowledge. It is a guide for practitioners about how to go about answering a
question or solving a problem. There are three major approaches to the study of industrial
economics/organization.

1. The first approach is primarily descriptive and provides overviews of industrial economics.
The traditional approach in industrial economics (or organization) is referred to as the structure-
conduct-performance (SCP) paradigm developed by Bain, Caves and others of Harvard School.
This approach studies the interrelationships between market structure, conduct and performance,
and often assuming that structure determines conduct, which in turn determines performance.
However, focus has shifted more on the simultaneous determination of structure and
performance using economic theory. The orientation of the SCP approach is primarily empirical,
they try to uncover empirical regularities across industries.

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2. Market organization and structure are assumed to reflect basic supply and demand conditions
in the market such as consumer demand, production, elasticity, technology, substitutes, raw
materials, unionization, rate of growth, product durability and location.

Market structure refers to those attributes of the market that influence the nature of competitive
process. The Market structure thus include the number of buyers and sellers, barriers to entry of
new firms, product differentiation, scale of economies, diversification, as well as government
regulations and antitrust policy. Conduct of firrms in market involves the way they establish
prices, advertising activities they engage in, the degree they engage in R&D, the degree to which
they collude, how they chose their products and merger. Performance is the appraisal of how
specific goals are satisfied such as profitability, production efficiency, allocative efficiency,
equity, product quality, technical progress, etc.

According to the traditional approach to industrial economics, basic conditions determine the
market structure, market structure determines conduct and in turn determines performance.
Meanwhile, government policy can influence market structure, conduct and performance.

3. Another approach to industrial organization is the Chicago school. The Chicago school relied
more on applied price theory in the context of a logical deductive system. In this approach,
Stigler and others at Chicago treated industrial organization as a logical extension of price theory
with heavy emphasis on empirical testing. This approach relied less on institutional framework.
It uses microeconomic model to explain firm behaviour and market structure.

The distinguishing features of this second approach are as follows:

I) The emphasis is on specific industries

2) The focus is on developing models of firm behaviour

3) Empirical work is based on well-founded models of firm behaviour.

The third approach is oriented to government policy as to economic regulation, antitrust law and
more generally, the economic governance of law in defining property rights, enforcing contracts
and providing organizational infrastructure.

Trends in Industrial Economics

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In addition to the methodological differences, industrial economics has become more
quantitative over the years. The studies have focused more on statistical examinations of lnter-
firm differences in explaining behaviour and performance.

Industrial economics has also expanded the types of topics studied. For example, extensive
investigations have been conducted of the internal structure and organization of firms and how
that organization affects behaviour.

Despite the differences in approaches, each method seeks to answer common questions such as
what determines differences in the market organization? What factors cause differences in
profitability among firms and across industries? How can the market structure of firms determine
their product choices, their methods of marketing, their pricing policies, and other dimensions of
firms’ behaviour? Furthermore, different approaches have also focused on costs and benefits of
diversification, mergers, and differences in plant sizes, as well as on factors that determine
investment and technological innovation.

INDUSTRIAL SECTOR

Definition

Industry refers to several forms of producing similar commodities. Therefore, industrialization is


the process by which poor countries could develop and industrialization is the development of
industries as a general development strategy. It is the process of building a nation’s capacity to
convert raw materials and other inputs to finished goods and to manufacture goods for other
production or final consumption.

Types of industry:

i. Processing Manufacturing

ii. Craft and mining industry.

CONTRIBUTION OF INDUSTRIAL SECTOR TO NIGERIA GDP

The rate of industrial sector contribution to G.D.P increased between 1960 and 1980 but from
1985 to 1988, it fell and lately to the year 2000, which was as a result of negative growth of

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industrial output that emerged from foreign exchange scarcity, use of obsolete machinery,
equipment, high production costs, etc.

Importance of Manufacturing:

Manufacturing is a sub-sector of industrial sectors (others are processing, craft, and mining sub-
sectors).

Manufacturing converts raw materials into finished consumer goods or intermediate goods.

Manufacturing, like other industrial

i. Activities, creates avenues for employment

ii. Beast agricultural production.

iii. To diversify the economy

iv. It helps the nation to increase its foreign exchange earnings

v. It enhances the skill of local labour

vi. It minimizes the risk of overdependence on foreign trade

vii. Leads to the fullest utilization of available resources.

STAGES OF INDUSTRIALIZATION:

The organization of manufacturing in Nigeria has passed through our stages of development,
namely,

a. Pre-independence era, was when manufacturing was limited to primary processing of raw
materials for exports and the production of simple consumer items by foreign multinational
corporations to gain a foothold in a growing market.

During this period, manufacturing was mostly resource-based but some elements of import-
substitution and imported raw material. Set-in- later.

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b. The second is the immediate post-colonial era of the 1960s characterized by more vigorous
import substitution and the beginning of a decline for export-oriented processing of raw
materials. Such a policy of import substitution was meant initially to reduce over-dependence on
foreign trade and save foreign exchange earnings which turned out to be a mere assemblage.

This negated the original aim since almost every item needed by the manufacturing industries
was imported into the country.

c. The third stage is the decade of the 1970s, this was remarkable because the advent of oil and
the enormous resources it provided for direct government investment in manufacturing industries
made the government exercise almost a monopoly, in the following sub-sectors such as steel
production, petroleum refining, petrochemicals, edible salt, Machine tools, yeast and alcohol,
and fertilizer this period was marked by the initiation of the indigenization program.

d. The last phase is the decade of the 1980s market by a fall in the government revenue upon
reduction in the prices of petroleum products.

An attempt was made at export promotion strategy on the realization of the pitfalls of the import
substitution strategy.

Government Incentives for Industrialization: -

The government of Nigeria hard encouraged industrialization in the following ways:

a. Tax holidays. Intact or new industries are exempted from the payment of profit tax for some
years of operation as five years.

b. Tariffs protection: the gov’t impasses heavy import duties on foreign goods to protect local
industries from international competition.

c. Total ban on certain foreign goods: - In Nigeria. The government has banned some foreign
goods to protect similar products

d. Provision of loams: In Nig. there are guidelines on credit allocation by financial institutions
such as commercial banks, Merchant Bank, and industrial development banks.

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e. Direct gov’t participation:- The gov’t has also come into participation directly in certain
strategic industries either alone or through joint participation with foreigners or local
entrepreneurs.

f. Export incentives: In Nig. export promotion incentives include the refund of import duty on
raw materials for production of export goods, refund of excise duty paid on export
manufacturers, and exemption from import levy of 30% of raw materials imported for export
production in 1986.

Strategies of Industrialization in Nigeria

a. Import substitution strategy


b. Export promotion
c. Balanced development
d. Local resource-based

-Import substitution strategy:- After independence, Nigeria changed from the policy of producing
primary products introduced by the colonial masters to that of producing those items originally
imported. The main was to lessen overdependence on foreign trade and save foreign exchange.

-Export promotion strategy

Realizing the pitfalls of the import substitution strategy, Nigeria added he strategy of export
promotion. This involves the production and exportation of new products and those originally
imported.

c. Balance development strategy:- the main aim of this strategy is to develop and promote greater
linkages within the sector. That’s there should be intra-industrial and inter-sectional linkages so
that transactions could increase

d. Local resource-based strategy:-

The government emphasized the strategy of industrialization by local sourcing of raw materials.
Therefore, industries are encouraged to find local substitutes or alternatives of their raw growth

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and use local millet and maize when the ban on wheat importation has necessitated the baking of
cornbread.

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