Industrial Organization, Fall 2012, Economics 243
2:30 pm – 3:25 pm MWF in Huntley Hall 321
In the real world the perfect competition of Economics 101 does not exist, while pure monopoly is unusual. Of course some markets are close; wheat farmers behave like our model competitive firm, while the local water company can behave as a monopolist. But such markets are unusual. In IO (industrial organization) we instead focus on the normal (but messy) world in between, oligopolistic markets with a small number of participants.
Competitive firms have no need of strategy. In contrast, strategic behavior is the essence of oligopoly: firms adjust behavior in anticipation of how they expect rivals to respond. A wheat farmer neither advertises nor engages in R&D, while Ford Motor Company or SABMiller constantly worry about their rivals.
One focus of the course is the analytics of oligopoly, with the accompanying formal models and associated jargon (Nash-Cournot equilibria, Bertrand competition). Building on top of the richness of these models, the course will cover a series of related topics, including price discrimination, advertising, product differentiation, vertical structure (such as franchising), network externalities and R&D.
Case studies are central to the course, in which we put theory to work. Alongside several short papers on assigned topics, you will be responsible for choosing, organizing, undertaking, presenting and writing up a project of your choice, focusing on a firm, industry or issue that piques your interest. There will also be quizzes and homework on formal models and a final exam.
This is a list of key “take-aways” for which you will be assessed through your understanding as reflected in exams, class discussion and writing assignments.
- be comfortable with the monopoly model, the engine that drives all other IO models
- be able to manipulate the Bertrand and Cournot oligopoly models graphically, algebraically and in 2×2 game form;
- be able to apply the basic price discrimination, bundling and two-part tariff models;
- be able to relate IO models to empirical features that make them more (or less) useful for analyzing a particular industry;
- be able to discuss strategies firms employ to enhance their market power, through tacit collusion, the creation of entry barriers, product differentiation and advertising;
- be able to identify and discuss the key “new economy” concepts and issues of research & development, intellectual property, and networks and standards.
This course will not devote time to antitrust and regulatory policy; our 12 week term is simply too short. The text however provides a particularly good platform for your own exploration, since it covers both US and EU policy and so provides a breadth missing in most treatments.
Prerequisites: Principles of Microeconomics (Economics 101)
You do not need to be an economics major. Industrial organization theory provides the core for strategy (e.g., Michael Porter) and hence is highly appropriate for business majors. Note though that we rely upon formal models, and the practice that comes from other upper-level economics classes makes you more comfortable in doing this.
Our primary text is (comparatively) non-technical, employing no formal game theory and little math beyond basic algebra and graphs; we complement that with a fine industry study monograph. I will supplement the text with additional models as the need arises.
Industrial organization is fun, in that it focuses on the rich variety of real-world behavior. Almost everyone has an industry they know, through hobbies or family or career aspirations; all are potential meat for our IO table. In my case, questions in graduate school at Yale about growth and technical change turned into a PhD dissertation (and then a book) on Japanese automotive suppliers; I’ve been an “car” person ever since. But I also have consulted on a steel industry project and on technology for a major HVAC manufacturer, and am writing about the evolving structure of retailing in Japan. However, despite our case study, I’m not much of a beer drinker.
As potential managers you aren’t attracted to competitive markets, where rivalry pushes (economic) profits to zero. It’s best to work at a monopolist, but finding one that isn’t regulated is a challenge. Most likely, then, you must forge your way through the dross of oligopoly. This course focuses on that world.
Texts and class:
Our principle text is Industrial Organization in Context by Stephen Martin (Oxford University Press, 2010).
For the nitty-gritty of real-world industries we will read a study that examines multiple facets of a single industry, Victor and Carol Tremblay, The US Brewing Industry: Data and Economic Analysis (MIT Press, 2009) as well as papers and book chapters; Johan Swinnen, ed., The economics of beer (Oxford, 2011) is on reserve in Leyburn.
Class discussion is central, though I present formal models from time to time. You thus need to prepare in advance. Because of the discussion focus, attendance is mandatory. We have at least one field trip and one outside speaker; unless you have an away athletic event, you are expected to arrange with your schedule so that you can participate.
Please submit all work in hard copy; printing a clean final version is your responsibility.
Sakai and WordPress:
I will post most readings on Sakai rather than distribute them in hard copy. Please check Sakai regularly for messages, schedule revisions and so on. We will also experiment with blogging; I’ve set up a WordPress site for that purpose. See also my own blogs, in particular http://autosandeconomics.blogspot.com/, which draws heavily upon IO theory.
If you have not yet written a research paper in economics, it’s time for that to change. Writing a successful paper requires systematic preparation. Typical problems include a weak topic, reliance upon poor sources, the failure to ground research in relevant IO models, and poor organization. In the background is a failure to start early enough, and to allocate enough time to writing and (particularly) revising.
As per the schedule below, I thus require that you submit a topic in advance, follow it up with a working bibliography, and provide an outline and then a partial draft that presents your analytic approach. I will not accept a paper that has not been proofread by someone other than yourself, which requires that you have a full draft complete before the deadline. As part of this process I expect you to avail yourself of office hours and urge you to utilize the Williams School Writing Consultants in the basement of Huntley.
I will hand out a detailed guideline on organization and style later this term.
Grading is on a letter basis. Final weights will be adjusted to reflect the actual number of short assignments and homework exercises.
||research paper (15-20 pages)
||take-home quizzes (3)
||short papers (2-3 pages each) and homeworks
||participation (including blogging)
I take it as a given that you will uphold the honor code, as reflected in my use of take-home exams and self-grading on problem sets. I will review with you standards for citing the work of others in your research paper — remember the Google Scholar motto, “on the shoulders of giants”. (See Smitka Shoulders of Giants.ppt  for full citation.)
As per university policy, please speak to me in private at the start of the term.
See WordPress for current office hours. Please note that a bad time is immediately before class.
I have a dumb phone — no snide comments! – so please do not text me; I do not use Facebook. However, do feel free to call my cell at 460-6288. I check email frequently.
I will put all papers on Sakai. We will experiment with blogging; I am currently testing the ease of use of WordPress, though Sakai also has blogging capabilities.
The following schedule will need to be adjusted. One speaker is on the schedule; another is pending. See also the H Parker Willis lecture. Not on the schedule are visits to two local brewing operations, and (potentially) the very large Coors facility in Elkton.