Business economics is concerned with the analysis of the behaviour of firms in markets and industries and with the determination of costs and prices. It therefore differs from the ways in which economics is most commonly used in business, which are concerned with descriptions and forecasts of behaviour in a macroeconomic environment.

The economics of industry, as the term suggests, has generally focused on the industry as its unit of analysis. Firms within the same industry do not differ from each other, or do so only in essentially trivial ways. The structure-conduct-performance paradigm, which is the dominant empirical tradition, describes how the structure of the industry determines the behaviour of individual firms. Since all firms in the same industry face the same external conditions, all can be expected to perform similarly. Differences in the performance of different firms in the same market - the principal concern of senior managers - are not accounted for.

The field of business strategy, quite distinct from business economics, was developed to account for differences in the performance of firms. More recently, however, business economics has also begun to bridge this gap. These developments include game-theoretic models of small-number interactions, the analysis of principal-agent relationships and activity-based costing systems. The resource-based theory of business strategy, which is concerned with the ability of a firm to add value - to create rents or quasi-rents - brings many of these elements of analysis together.

John Kay