Industrial Organization Contemporary Theory and Practice

by Pepall, Lynne; Richards, Daniel J.; Norman, George

• ISBN13: 9780324067729
• ISBN10: 0324067720
• Format: Hardcover
• Copyright: 2001-08-06
• Publisher: South-Western College Pub

Summary

This textbook brings modern I/O analysis to the undergraduate level. Consistent with modern analysis, the authors focus explicitly on the nature of strategic interaction and make extensive use of game theoretic tools. At the same time, they never lose sight of the policy motivation behind much IO analysis. Formal analysis is combined with many practical applications, and the presentation does not assume familiarity with calculus, rather it relies on the ability to work through algebraic equations.

Author Biography

Lynne Pepall is Associate Professor of Economics at Tufts University. Dan Richards is Associate Professor of Economics at Tufts University. George Norman holds the William and Joyce Cummings Family Chair of Entrepreneurship and Business Economics at Tufts University.

Table of Contents

Introduction	1	(52)
Competition versus Monopoly: The Poles of Market Performance	3	(19)
Perfect Competition	5	(5)
Monopoly	10	(5)
Profit Today versus Profit Tomorrow: Firm Decision Making over Time	15	(7)
Efficiency, Surplus, and Size Relative to the Market	22	(8)
The Monopolist and Surplus	25	(2)
The Nonsurplus Approach to Economic Efficiency	27	(3)
Competition, Monopoly, and Somewhere in Between: The Evolution of Industrial Organization Theory and Antitrust Policy	30	(23)
Antitrust Policy: The First Thirty Years	30	(6)
The ``New'' Sherman Act and the Dominance of Structure-Based Analysis	36	(2)
The Chicago School and the New IO	38	(5)
Summary	43	(2)
Problems	45	(2)
References	47	(1)
Appendix: Key Excerpts from Antitrust Statutes	48	(5)
Technology, Costs, and Market Structure	53	(49)
Measuring Market Structure	54	(8)
Measuring Market Structure	55	(2)
Measurement Problems: What Is a Market?	57	(5)
Production Technology and Costs	62	(14)
The Neoclassical or Technological View of the Firm	62	(2)
The Single-Product Firm	64	(5)
Sources of Scale Economies	69	(2)
Scale Economies---Fixed Costs and Sunk Costs	71	(5)
Multiproduct Technology: Economies of Scale and Scope	76	(12)
Flexible Manufacturing: Scope Economies and Product Differentiation	85	(3)
Noncost Determinants of Industry Structure	88	(4)
The Size of the Market	88	(1)
Network Externalities and Market Structure	89	(1)
The Role of Government Policy	90	(2)
A Brief Note on Measuring Market Structure versus Measuring Market Performance	92	(10)
Summary	94	(1)
Problems	95	(3)
References	98	(2)
Appendix: Conversion from the Standard Industrial Classification (SIC) Codes to the North American Industry Classification System (NAICS)	100	(2)
Basic Monopoly Pricing and Product Strategies	102	(52)
Strategies and Degrees of Price Discrimination	103	(29)
First-Degree Price Discrimination	108	(8)
Second-Degree Price Discrimination	116	(7)
Third-Degree Price Discrimination	123	(9)
Price Discrimination and Social Welfare	132	(1)
Public Policy and Price Discrimination	133	(4)
Monopoly, Product Quality, and Social Welfare	137	(9)
The Multiplant Monopolist	146	(8)
Summary	149	(2)
Problems	151	(2)
References	153	(1)
Product and Pricing Strategies for the Multiproduct Monopolist	154	(69)
Product Variety and Price Discrimination	156	(5)
A Spatial Approach to Product Variety	161	(19)
Monopoly and Product Variety without Price Discrimination	163	(10)
Is There Too Much Product Variety?	173	(4)
Monopoly and Product Variety with Price Discrimination	177	(3)
Bundling, Tie-Ins, and Price Discrimination	180	(21)
Commodity Bundling and Tie-In Sales	180	(1)
Commodity Bundling as a Mechanism for Price Discrimination	181	(9)
Required Tie-In Sales	190	(4)
Complementary Goods, Network Externalities, and Monopoly Pricing	194	(7)
Antitrust, Bundling, and Tie-In Sales	201	(22)
Bundling and the Microsoft Case	201	(5)
Antitrust Policy and Product Tying: Additional Developments	206	(4)
Summary	210	(1)
Problems	211	(4)
References	215	(1)
Appendix A: Location Choice with Two Shops	216	(2)
Appendix B: The Monopolist's Choice of Price When Its Shops Have Different Costs	218	(3)
Appendix C: Formal Proof of the Inefficiency Induced by the Marketing of Complementary Goods by Separate Monopolists	221	(2)
Theories of Business Strategy in Oligopoly Markets	223	(59)
Strategic Interaction: Introduction to Game Theory	225	(12)
Dominated and Dominant Strategies	230	(2)
The Nash Equilibrium as a Solution Concept	232	(5)
Single-Period Models of Oligopoly	237	(1)
The Cournot Duopoly Model	238	(20)
Variations on the Cournot Theme: Many Firms and Different Costs	247	(7)
Concentration and Profitability: Implic;ations of the Cournot Model	254	(4)
Price Competition: The Bertrand Duopoly Model	258	(13)
Bertrand Reconsidered	263	(3)
Price Competition and Product Differentiation: Bertrand in a Spatial Setting	266	(5)
A Sequential Model of Oligopoly: The Stackelberg Model	271	(11)
Summary	276	(1)
Problems	277	(3)
References	280	(2)
Monopoly Power and Predatory Conduct	282	(67)
Monopoly Power and Market Entry: Some Basic Facts	284	(2)
Predatory Conduct: Limit Pricing versus Predatory Pricing	286	(11)
Limit Pricing	287	(2)
Predatory Pricing	289	(8)
Credibility of Threats in Dynamic Games	297	(7)
A Simple Dynamic Game of Market Entry	298	(4)
The Chain Store Paradox	302	(2)
Capacity Expansion as a Credible Entry-Deterring Commitment	304	(19)
Capacity, Commitment, and Credible Entry Deterrence	305	(13)
Preemption and the Persistence of Monopoly	318	(2)
Anecdotal Evidence on Predatory or Preemptive Capacity Expansion	320	(3)
Limit Pricing and Imperfect Information	323	(6)
Contracts as a Barrier to Entry	329	(6)
Long-Term Contracts to Deter Entry	330	(3)
Tying as a Predatory Contractual Arrangement	333	(2)
Predatory Conduct and Public Policy	335	(14)
Summary	343	(1)
Problems	344	(2)
References	346	(3)
Collusion and Cartels	349	(58)
Challenges Facing Cartels	351	(2)
Cartels: Cooperation versus Conflict	353	(4)
Repeated Games	357	(20)
Modeling a Repeated Game	358	(2)
Repeated Games with a Finite Horizon	360	(8)
Repeated Games with an Infinite Horizon	368	(1)
A Digression: What We Mean by the Discount Factor	369	(1)
Trigger Strategies, Successful Collusion, and the Folk Theorem	370	(7)
Where Is Collusion Most Likely to Occur?	377	(9)
The Potential for Monopoly Profit	377	(1)
Costs of Reaching a Cooperative Agreement	378	(5)
Costs of Maintaining a Cooperative Agreement	383	(1)
Stable Market Conditions	384	(2)
An Illustration: Possible Collusion on the NASDAQ Exchange	386	(7)
Detecting Collusion among Firms	393	(14)
Summary	400	(1)
Problems	401	(4)
References	405	(2)
Mergers	407	(64)
Horizontal Mergers	410	(16)
The Merger Paradox	410	(4)
Merger and Cost Synergies	414	(4)
The Merged Firms as Stackelberg Leaders---Paradox Lost	418	(8)
Horizontal Mergers and Product Differentiation	426	(10)
No Price Discrimination	428	(6)
Price Discrimination	434	(2)
Vertical Mergers	436	(13)
Mergers of Firms That Produce Complementary Goods	436	(1)
Vertical Mergers: Resolving a Complementarity	437	(6)
Vertical Merger to Facilitate Price Discrimination	443	(2)
Vertical Merger to Facilitate Market Foreclosure	445	(4)
Conglomerate Mergers	449	(4)
Possible Economies Associated with Conglomeration	449	(2)
Managerial Motives	451	(2)
A Brief Digression on Mergers and the Theory of the Firm	453	(2)
Mergers and Public Policy	455	(16)
Summary	461	(1)
Problems	462	(5)
References	467	(2)
Appendix: Equilibrium Prices in the Spatial Model	469	(2)
Vertical Relations and Restraints	471	(57)
Vertical Restraints as a Response to Double Marginalization	475	(11)
Double Marginalization, Royalties, and Moral Hazard	477	(4)
Two-Part Tariffs as a Solution to the Double Marginalization Problem	481	(2)
Resale Price Maintenance and Double Marginalization	483	(3)
Vertical Price Restrictions to Ensure Provision of Retail Services	486	(12)
Optimal Provision of Retail Services	488	(2)
The Case of a Monopoly Retailer and a Monopoly Manufacturer	490	(3)
The Case of Competitive Retailing	493	(2)
Resale Price Maintenance, Customer Services, and Free Riding	495	(3)
Resale Price Maintenance as a Response to Variable Demand	498	(7)
RPM Agreements in Historical Perspective	505	(3)
Nonprice Vertical Agreements	508	(6)
Exclusive Selling and Territory Arrangements	508	(4)
Competition Upstream and Exclusive Dealing	512	(2)
Franchising and Divisionalization	514	(5)
A Note on Vertical Relations and the Theory of the Firm	519	(9)
Summary	523	(1)
Problems	524	(2)
References	526	(2)
Advertising	528	(61)
Consumer Fraud and Truth in Advertising	533	(3)
Advertising: Some Basic Analysis	536	(6)
The Extent of Advertising in the United States	536	(1)
Early Views on the Effect of Advertising Expenditures	537	(5)
Advertising and Signaling	542	(5)
A Complementary View of Advertising and Monopoly Power	547	(19)
Advertising and Crowd Appeal	551	(3)
Advertising, Brand Recognition, and Information	554	(1)
The Monopolist's Profit-Maximizing Choice of Advertising	555	(7)
Monopoly Power: Too Much or Too Little Advertising	562	(1)
Competition and the Extent of Advertising	563	(3)
Advertising and Brand Competition	566	(12)
Cooperative Advertising	578	(11)
Summary	583	(2)
Problems	585	(1)
References	586	(3)
Research and Development	589	(65)
A Taxonomy of Innovations	593	(3)
Market Structure and the Incentive to Innovate	596	(10)
R&D as Direct Interfirm Competition	600	(4)
Some Evidence	604	(2)
Patents and Patent Policy	606	(7)
The Optimal Patent Length	607	(4)
The Optimal Breadth of Patents	611	(2)
Patents, Patent Races, and Innovation as Influences on Structure	613	(13)
Patent Races	613	(7)
Patents and Innovative Activity as an Influence on Market Structure	620	(2)
Monopoly Power and ``Sleeping Patents''	622	(4)
Technology Licensing	626	(8)
The Incentive for an Oligopolist to License a Nondrastic Innovation	627	(1)
Licensing, Drastic Innovations, and Monopoly Power	628	(2)
Patent Licensing, Social Welfare, and Public Policy	630	(4)
Cooperation on R&D between Firms	634	(20)
Noncooperative R&D: Profit, Prices, and Social Welfare	636	(5)
Technology Cooperation	641	(6)
Summary	647	(1)
Problems	648	(3)
References	651	(3)
Current Critical Issues: Network Externalities, Auctions, and Strategic Trade Policy	654	(49)
Network Externalities	655	(22)
Monopoly Provision of a Network Service	657	(9)
Systems Competition and the Battle Over Industry Standards	666	(8)
Public Policy and Network Markets	674	(3)
Auction Markets	677	(13)
Private Value Auctions	678	(5)
Common Value Auctions	683	(3)
Auction Theory and Antitrust Policy	686	(4)
Strategic Trade Policy	690	(13)
Unilateral Intervention in International Markets	690	(5)
International Trade Agreements as Cooperative Mechanism	695	(2)
Summary	697	(1)
Problems	698	(2)
References	700	(3)
Answers to Practice Problems	703	(10)
Glossary	713	(4)
Index	717