Time and Location:
Class meetings: Monday, 9h30-12h30, R5460.
Office hours: by appointment, R-5015.
Description of the Course
The course is concerned with organization of production and its consequences for economic efficiency. The first part of the course looks at consequences of market concentration. It describes pricing and market differentiation behavior of a firm for either of the market structures: a monopoly and a duopoly The second part of the course takes a more general perspective: it inquires in determinants of market concentration. A firm's strategy is (i) a "long-run" action that influences the market structure and a "short-term" pricing behavior in the market. The third part of the course investigates the relationship between the consumer behavior and the market structure.
Required textbook is Jean Tirole, The Theory of Industrial Organization,
MIT Press, 1988 ("à mon réserve" in the library).
We will use some examples that are described in: Jeffrey Church and Roger Ware,
Industrial Organization: A Strategic Approach, McGraw-Hill Press, 1999;
Michael Whinston, Lectures on Antitrust Economics, Princeton University
Press, 2007;
Patric Rey, Jean Tirole, A Primer on Foreclosure, in Handbook of Industrial
Organization, Mark Armstrong and Rob Porter eds., vol. III, North Holland, 2007.
Additional readings will be downloadable at this webpage.
Prerequisites: competitive equilibrium model; optimization; noncooperative game theory. They will be revised in class upon necessity.
Grading will be upon presentation in class and the final examination.
They will count toward the grade as follows.
Final examination 60%.
Outline of the Course
Introduction:
Structure-conduct-performance paradigm and its criticism: measurement and interpretation
issues (Tirole: p.1-4; Church and Ware: Ch.12).
Competitive equilibrium paradigm. Welfare analysis in Partial Equilibrium model
(Tirole: p.6-11; Church and Ware: Table 12.2, p.447).
Additional reading:
Competitive equilibrium model: lecture notes;
Concentration in the US manufacturing: three tables (source: http://www.census.gov/mcd/historic/mc92cr.txt;
http://www.census.gov/epcd/naics02/naicod02.htm;
http://www.census.gov/epcd/ec97brdg/INDXNAI3.HTM#21)
Part I: consequences of market concentration
1. Monopoly pricing behavior.
A. Linear pricing:
A.1 Single good (Tirole: p.65-69): deadweight loss from distortion of output;
A.2 Multiple goods (Tirole: p.69-72) pricing with:
(i) dependent cost: learning-by-doing (Tirole: p.71-72, exercise solved in
class),
Armen
Alchian (1963), "Reliability of Progress Curves in Airframe Production,"
Econometrica, Vol. 31(4 ):679-693;
Boston Consulting Group, The
experience curve revised;
NASA learning-curve calculator;
Douglas
A. Irwin, Peter J. Klenow (1994), Learning-by-Doing Spillovers in the Semiconductor
Industry, The Journal of Political Economy, 102 (6):1200-1227;
capacity and pricing with peak- and off-peak demands (Tirole: ex.1.6, Church
and Ware: p. 802-809);
(ii) dependent demands: Coase conjecture(Tirole: 80-87; ex.1.9; Church and
Ware: case studies 4.1 and 4.3); commitment to future prices (ex. 1.9); leasing;
secondhand markets (Tirole: 79-81).
Michael
Waldman, Durable Goods Theory for Real World Markets, The Journal of Economic
Perspectives, Vol. 17, No. 1 (Winter, 2003), pp. 131-154
"Have You Ever
Tried to Sell a Diamond?" by E.J. Epstien, Atlantic Monthly, February 1982
United
States v. United Shoe Machinery Corporation: An Economic Analysis of an Antitrust
Case by Carl Kaysen, Stanford Law Review, Vol. 9, No. 1 (Dec., 1956), pp.
209-213
Michael Waldman (1997), Estimating the Market for Secondhand Goods: an alternative
explanation for leasing, Journal of Law and Economics, 40(1):61-92.
Perishable durable
goods, In-Koo Cho, mimeo
Drew
Fudenberg, Jean Tirole (1998), Upgrades, Tradeins, and Buybacks, the RAND Journal
of Economics, Vol. 29, No. 2 (Summer, 1998), pp. 235-258
B. Monopoly choice of quality with vertical differentiation (Tirole: chapter 2).
B.1 Observable quality: Swan theorem; planned obsolescence (ex. 1.10);
Toshiaki Iizuka (2004), An Empirical Analysis of Planned Obsolescence, mimeo
Judith
A Chevalier, Austan Goolsbe (2003), Are Durable Goods Consumers Forward Looking?
Evidence from College Textbooks.
B.2 Unobservable quality: "lemons" problem and the ways to attenuate it: warranties
and reputation; signalling through pricing, advertising
Thomas
W. Ross, Product Warranties and Double Moral Hazard Russell Cooper, The RAND
Journal of Economics, Vol. 16, No. 1 (Spring, 1985), pp. 103-113
P.
H. Dybvig, N. A. Lutz (1993), "Warranties, Durability, and Maintenance:
Two-sided Moral Hazard in a Continuous-Time Model," The Review of Economic
Studies, 60(3):575-597
A
Simple Theory of Advertising as a Good or Bad Gary S. Becker, Kevin M. Murphy
The Quarterly Journal of Economics, Vol. 108, No. 4 (Nov., 1993), pp. 941-964
Daniel
A. Epstein (2007), The Effect of Free Internet Advertising on the Pricing of
Used Cars
C. The third-, the first- and the second decree price discrimination: non-linear
pricing (Tirole Ch 3: 133-139, 153-154, 143-148; 152).
The Robinson-Patman
Act: General Principles
Volvo v. Reeder-Simco;
(antitrust
magazine)
Price discrimination
in Broadway Theater Leslie, RAND (2004).
2. Duopoly competition.
A. Competition with symmetric information
Revision: Games with complete information
Notes: part1, part2,
part3, part4.
Bertrand paradox and solutions to it: (i) pre-commitment through: capacity constraints
(Cournot game), horizontal differentiation (p. 279-282); (ii) repeated interaction
(tacit collusion).
The market for
news Mullainathan, Shleifer, AER(2005)
Media
Bias and Reputation, Matthew Gentzkow, Jesse M. Shapiro
What
Drives Media Slant? Evidence from U.S. Daily Newspapers, Gentzkow, Shapiro
THE
IMPACT OF COLLUSION ON PRICE BEHAVIOR: EMPIRICAL RESULTS FROM TWO RECENT CASES,
Yuliya Bolotova, John M. Connor, and Douglas J. Miller
The
Global Lysine Price-Fixing Conspiracy of 1992-1995 John M. Connor Review of
Agricultural Economics, Vol. 19, No. 2 (Autumn - Winter, 1997), pp. 412-427
C. Competition with asymmetric information.
Part II: determinants of the market structure
1. Technology and the market structure: contestability; a primer in regulation.
2. A firm's strategy and the market structure.
A. Increasing commitment abilities: capacity constraints, match-the-rival price policy, location in the product space.
B. Reinforcement of market power: establishment of clientele; vertical restraints;
C. Gaining technological or credit advantage: R&D, long-purse story (a primer in corporate finance).
D. Signaling through prices.
E. Mergers and acquisitions (a primer in theory of a firm)
The Microsoft Antitrust Case by Nicholas Economides: p. 22-24 (Internet Explorer+Windows)
Part III: consumer behavior and the market structure
A. Networks; double-sided markets.
B. Behavioral IO.