In 1976 Miller introduced Miller Lite, which was an instant hit and vaulted Miller from being an also-ran into a rival to Anheuser-Busch and its leading beer, Budweiser. How should AB [now AB Inbev] respond? Should they mimic Miller’s success and launch their own more-or-less identical light beer, or would they find it better to offer a somewhat different product that might capture consumers who wanted a brew with a little more substance? We know the answer, but that analysis serves as a good introduction to the issue of strategic interaction.
We’re not interested in competitive industries such as wheat farming. Such are in any case unusual. Instead we look at industries that are typified by small numbers of players. How much should a firm advertise? – for farmers, the answer is “none.” That’s not very interesting, and anyway, who wants to work in a competitive industry where equilibrium profits are zero? Probably none of you!
Do firms benefit from bundling products? (Generally yes.) When is engaging in R&D central? What is the role of patents? (Surprisingly, in most industries they aren’t central to product strategy.) When is competition one of “winner takes all” (think Microsoft) and when is it impossible (or at least undesirable) to keep out rivals? And how about pricing – will competitors raise prices if you do, or will they stand pat and grab market share? Does predatory pricing or acquiring one of your competitors make sense? (In general, no.)
Most of the time the answer is, “it depends.” Strategy con’t be derived from a formula, but we do find that we can use the same approach to analyze many different strategic situations. We begin by developing our workhorse “engine,” the monopoly model, and by characterizing demand using elasticities and supply using economies of scale and marginal cost. We then develop a series of models of industries with two players, with various margins of adjustment (capacity, price). That lets us analyze predation, mergers and strategies that support tacit collusion. (Explicit collusion is illegal everywhere, and in the US can lead to a felony conviction for the managers involved in “price fixing”.)
The above issues are ones of “horizontal” structure. After laying the foundation, we then examine vertical structures and behavior vis-a-vis consumers. For the former we focus on franchising. For the latter we analyze product differentiation, bundling and advertising.
The last part of the course is devoted to technology. What is the nature of innovation? Is it more profitable for large firms to innovate? is it less costly for them to do so? To what extent is technology intrinsically a public good? Do innovations diffuse rapidly? Or can patents turn an innovation into a private good? If so, what are the costs and benefits of “intellectual property rights” (IPR)? When is IP central to competition, and when are markets ones where “winner takes all”, so that what really matters is buying market share?
Most universities teach “industrial organization” (IO) across two 15-week terms, with the second term devoted to antitrust and merger policies, and the details of the relevant legislation and court rulings. All of the standard texts are structured accordingly, so unfortunately we all are stuck carrying around a tome of which we only use the first half. (The are two exceptions, both graduate school texts that focus on solving formal mathematical models, not real world examples.) This is not a math course. However, if you are thinking about graduate school in economics, see me in office hours and we can explore one or two models in greater (mathematical) depth.
Texts and Approaches
- Martin, Stephen. Industrial Organization In Context. Oxford University Press, 2010. ISBN: 978-0199291199
- Ogle, Maureen. Ambitious Brew. Mariner Books, 2007. ISBN: 978-0156033596
Martin covers the core theory, but embeds those in discussions of real-world examples. Homework assignments and tests focus on the models Martin presents, and we will discuss many of his examples in class. The Ogle book focuses on examples, covering issues of technology, scale economies, advertising, distribution, and multiproduct strategy. If scheduling works, we’ll supplement it and other beer readings with a visit to Devils Backbone, to meet with their COO. In any case, the economics literature (and news) on the brewing industry provide material for short papers. Many other good industry and firm studies are available. I read ones this summer of the chocolate industry and of cell phones and I’ve co-authored one on the automobile industry. In the past I’ve assigned ones for steel, toys, and farm machinery. Name an industry, and there’s likely a good book, often penned by a member of the Industry Studies Association or the Business History Conference. So if you don’t like beer, or are fascinated with another industry, you can always “pitch” another topic for any of our papers. Most of the time I can point you to good sources.
While we focus on applications, and for that to work you need to read the relevant case studies prior to class. We still need to develop theory. The model of monopoly is central, and so we spend an initial block working on that, and on ways to characterize consumer demand and producer costs. There will be a problem set or two for this, and for a couple other models later in the term. The two take-home exams and a portion of the final will test your knowledge of these. Two papers and a portion of the final exam will focus on applications. To provide a more free-wheeling format, we will also engage in an online discussion of one blog post or article each week.
|Beer Paper #1
|Beer Paper #2
Good Writing Practice
Be concise. Don’t use the passive voice, avoid indefinite modifiers (“a lot”). Above all, proofread! Never hand in a first draft. Ask classmates, siblings, parents … but (cf. Honor Code) duly acknowledge their input. Oh, and all work should be in hard copy, double-spaced, using Times New Roman 11pt with 1″ margins.
See the Office Hours tab. I run a tab when I meet with you at the Lexington Coffee Shop; let them know, don’t pay! In my office, I serve tea. I prefer that you communicate by email at MSmitka@wlu.edu as I seldom check my phone for messages and missed calls.
All work that you hand in – exams, papers, homeworks – is presumed to fall under the Honor Code. I do expect you to have peers proofread your papers; acknowledge them. For takehome exams, note the beginning and end times. It is of course good reinforcement to write out the pledge.
Please contact me in private, as per the university policy quoted below. Note that you will need to work in advance with me for the final exam if you need a separate room or extra time.
Washington and Lee University makes reasonable academic accommodations for qualified students with disabilities. All undergraduate accommodations must be approved by the Title IX Coordinator and Director of Disability Resources. Students requesting accommodations for this course should present an official accommodation letter within the first two weeks of the term and schedule a meeting outside of class time to discuss accommodations. It is the student’s responsibility to present this paperwork in a timely fashion and to follow up about accommodation arrangements. Accommodations for test-taking must be arranged at least a week before the date of the test or exam, including finals.