English, Article edition: The Impact of the New Industrial Economics on Industrial Policy-Making Karl Aiginger

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Physical Description
  • article
Language
  • English

Edition details

Title
  • The Impact of the New Industrial Economics on Industrial Policy-Making
Author
  • Karl Aiginger
Physical Description
  • article
Notes
  • Game theory models the consequences of the simultaneous actions of several decision makers, each pursuing his own interests ("target function"), but knowing that his actions do not take place within an immutable environment ("nature", "exogenous variables") as other rational actors also seek to maximize their gains. At the center of a game, therefore, is the reciprocal influence (interactions) of the decision makers. Possible outcomes of the game ("equilibrium") are only those combinations of strategies which fulfill certain requirements regarding each actor, for example that each actor is satisfied with his pay-off when he learns the pay-off due to others ("Nash equilibrium"). Game theory has changed industrial economics in a decisive way. Beginning as a theoretically unattractive branch of economics, industrial economics has developed into a vanguard in methodology. It must be pointed out, however, that empirical applications have not kept up with theoretical advances and that applications in policy-making are still in the initial stages. This paper sketches one area in which the first steps have already been taken: the application of industrial economics to competition policy. The choice of game theory as a method in industrial economics constitutes an important step in modeling reality. Game theory identifies optimal behavior in those situations in which several enterprises maximize their target function knowing that other enterprises will do the same. This strategic interaction is an important element of decision-making in business. The choice of the class of non-cooperative games – i.e., of those games in which no binding contracts are possible – in applications to industrial economics has also turned out to be fruitful. Only a small portion of the interactions between enterprises as well as between policy makers and enterprises can be regulated through contracts. In many cases the outcome depends crucially on the choice of parameters which cannot be fixed contractually in advance. The determination of these parameters occurs ex post, with each actor pursuing his own interests. Only an outcome with which all partners are relatively satisfied can be considered optimal. Relative bargaining strength can be altered through strategic behavior, but the fact that the opponent will react to one's own moves must always be taken into account. The new industrial economics warns us that most existing institutions will not be able implement industrial policy goals through legislation. Only a careful structuring of institutions and of incentive mechanisms will bring about behavior that is better for society than behavior without policy intervention. Policy measures themselves must increase welfare (e.g., by producing external effects), and implementation must be carried out in such a way that the desired behavior is chosen by enterprises on their own on the basis of newly introduced incentives. Choosing such a set of incentives is a hard task because enterprises, faced with new incentives, may react in a different way than before.
  • Einfluß der neuen Industrieökonomie auf die Industriepolitik; The Impact of the New Industrial Economics on Industrial Policy-Making
  • RePEc:wfo:monber:y:1996:i:7:p:475-491
Language
  • English
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