In the first episode of interview with Prof. Dr. Toker Doganoglu, Dean of the faculty of economic at the University of Wuerzburg and holder of the chair for Industrial Economics, we talked about the odd species of economists, what they do and how they approach problems . Moreover, we discussed the basics of industrial economics and why its principles and messages are practically relevant for all organizations and decision-makers. Finally, Prof. Doganoglu explains at the example of organic eggs, how consumers could profit from product bans.
What’s the deal behind industrial economics?
What is this field of research trying to explore? Industrial economics deals with problems of market failures, inefficiencies and strategic actions of market players. In contrast to the perfect world that is automatically coordinated by the invisible hand – the perfect mechanisms, described by Adam Smith (1759, 1776) – in reality, markets are mostly imperfect and inefficient. Industrial economics explores situations where markets don’t work and derives proposals about certain measures, that can increase overall welfare. However, in order to be competent deciding whether markets work or not, you have to understand how market players act, which strategies they follow, how their interactions affect market outcomes and if certain actions lead to positive or negative welfare effects. In the next step, industrial economists develop proposals for policy makers or other participants in the markets about how they should act, given certain market structures and potential market imperfections.
How economists approach problems?
Industrial Economics is a field of research that is practically relevant. But non-economists often look at the theories and methodologies and are confused. That’s because they have to understand how economists approach problems.
1) Start from a practical (market) problem.
2) Understand the problem and its important elements.
3) Translate these important elements into an abstract model.
4) Study this abstract simplified model, which is in fact a good representation of the practical situation.
4) Re-Translation: The messages, being derived from the models, get translated back into prose.
For non-economists, it might seem like a confusing procedure. But economists need the abstraction in order to get a general understanding of the situation. Models are like maps – they provide orientation in a complex world and try to give a deeper understanding of certain situations. They explain interactions and market mechanisms, market failures and inefficiencies, why failures occur and what strategies lead to welfare improvement. As not everybody can deal with the high degree of complexity, economists are responsible to translate their findings back into full sentences and clear proposals. Industrial economists try to improve markets and make the world(-market) a better place.
HOW CONSUMERS CAN PROFIT FROM PRODUCT BANS
Prof. Doganoglu has been recently working on research questions that are at the first glance “outside the box”. He has recently worked on the research question, how product bans might increase consumers welfare. The project idea has emerged during a discussion, that Prof. Doganoglu had with his wife. In this story, the leading part is played by organic eggs. People claim that organic food is better and healthier than regular food. These products are usually more expensive, which leads to an allocation where only the more affluent people are able to purchase them. As a large group of population, namely less affluent people, is not able to consume a superior good, that is healthier but has a higher price, it looks like a market imperfection. The goal was to look for a mechanism that induces also less affluent people to buy superior goods, i.e. healthier food. By completely banning low quality production, there will be a potentially higher competition in the high-quality market segment, which leads to drop in prices and constellations with a higher consumer rent. Link to publication: https://link.springer.com/article/10.1007/s10842-014-0179-z
For more details, listen to Episode #34 of the WUEconomics Outside the Box Podcast and leave me a feedback & itunes rating!
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