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Antitrust
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THE THEORY of INDUSTRIAL
ORGANIZATION - 1
Professor: Oleg Eismont The course
analyzes the problems of the real economy that cannot be described
within the framework of a classical economic theory that is taught
by traditional micro- and macroeconomics. Lecture course covers all
the three main fields of industrial organization theory: the theory
of a firm, the theory of imperfect competition, and the theory of
economic regulation. The students are presumed to be familiar with
the standard courses in micro- and macroeconomics at the graduate
level. The lecture course corresponds to master’s level. As the basic
materials for studies, textbooks and papers in periodicals and monographs
are used. The course includes 14 lectures,
6 seminars and 2 home assignments. Written exam concludes the course.
The final grade is the weighted average of the grades at the exam
(70%) and home assignments (30%).
Theory of a
firm (1 lecture). What is the
firm and why is it organized? A firm as an alternative to a market.
Transaction costs theory explaining appearance of firms. Production
scale, specialization level and advantages of firms as a means of
production. Hierarchical
firm structure and its efficiency. Optimal size of a firm (of a number
of hierarchical levels). Hierarchical firm structure under oligopoly.
Coase R.H.,
1992, The Institutional Structure of Production, American Economic
Review, vol. 82, 713-719. Martin S.,
1993, Advanced Industrial Economics, Blackwell. Williamson
O.E., 1981, The Modern Corporation: Origins, Evolution, Attributes,
Journal of Economic Literature, vol. 19, 1537-1568. Williamson
O., 1996, The Mechanisms of Governance, Oxford University Press.
Consumer Surplus and Public Welfare (1 lecture). Estimation
of public welfare within the framework of partial equilibrium analysis.
Quasilinear utility function and measure of public welfare. Compensated
and equivalent variations. Public welfare and Hicksian and Marshallian
demand functions. Consumer surplus as an approximate measure of public
welfare. Tirole J.,
1988, The Theory of Industrial Organization, The MIT Press. Varian H.,
1992, Microeconomic Analysis, W.W. Norton & Company. Willig R.,
1976, Consumer’s Surplus Without Apology, American Economic Review,
vol. 66, 589-597.
Economic
Theory of Bundling (1 lecture). Bundling as a marketing
tactics. Price discrimination and bundling. Heterogeneous consumers. Pure components strategy,
pure bundling strategy, and mixed bundling strategy. Superiority of
mixed bundling relative to pure bundling. Conditions for mixed bundling
strategy to be dominant over pure components strategy. Independent
distribution of reservation prices. Homogeneous consumers. Commodity bundling and consumer
surplus. Adams W.J., and J.L. Yellen,
1976, “Commodity Bundling and the Burden of Monopoly”, Quarterly
Journal of Economics, vol. XC, 475-498. McAfee R.P., J. McMilan,
M.D. Whinston, 1989, “Multiproduct Monopoly, Commodity Bundling, and
Correlation of Values, Quarterly Journal of Economics, vol.
CIV, 371-383.
Mergers and
Acquisitions. Horizontal
Mergers and Acquisitions (2 lectures). Types of mergers
and acquisitions: horizontal, vertical, conglomerates. Examples of
mergers and acquisitions within the last decade. Mergers of firms
with identical production costs. Condition of a merger profitability.
Mergers of firms with differing production costs. Reaction of a firm
to a change in output by all other firms on the same market. Condition
of industry output increase, resulting from a merger. Horizontal
mergers and public welfare. Herfindal-Hirshman index as a measure
of public welfare. Condition under which horizontal merger results
in higher public welfare. Farrel J.,
and C. Shapiro, 1990, Horizontal Mergers: An Equilibrium Analysis,
American Economic Review, vol. 80, 107-126. Salant S.W.,
S. Switzer, and R.J. Reynolds, 1983, Losses from Horizontal Merger:
The Effects of an Exogenous Change in Industry Structure on Cournot-Nash
Equilibrium, Quarterly Journal of Economics, vol. 98, 185-199.
Vertical Mergers (1 lecture). Effect of a
vertical merger on output of final and intermediate products. Vertical
mergers and market foreclosure. Vertical mergers and profits of integrated
and unintegrated firms. Martin S.,
1993, Advanced Industrial Economics, Blackwell. Salinger M.A.,
1988, Vertical Mergers and Market Foreclosure, Quarterly Journal
of Economics, vol. 77, 345-356.
Product Differentiation
Location Models
(1 lecture). Linear city,
linear transportation costs. Quadratic transportation costs. Stability
of equilibrium states. Circular city. Welfare implications. Shy O., 1995, Industrial Organization, The MIT
Press. Tirole J.,
1988, The Theory of Industrial Organization, The MIT Press.
Differentiated
Goods, Increasing Returns to Scale, and Monopolistic Competition (1 lecture). Markets for differentiated goods. The problems
solved by consumers and producers. Market equilibrium under free entry
conditions. Effects of fixed costs and market size on product diversity
and output. Dixit A.K., and J. Stiglitz,
1977, Monopolistic Competition and Optimum Product Diversity, American
Economic Review, vol. 67, 297-308. Shy O., 1995, Industrial
Organization, The MIT Press.
Industrial Agglomeration (1 lecture). Phenomenon
of industrial agglomeration. Increasing returns to scale as a driving
force of agglomeration. External and internal mechanisms of increasing
returns to scale. The role of transportation costs. A simple model
of industrial agglomeration: two regions, two production factors (perfectly
mobile workers and immobile farmers). Competition and market size
– the main factors affecting the process of industrial agglomeration.
Effects of transportation costs, fixed costs, a share of immobile
factor on industrial agglomeration. Stability of distributed and agglomerated
equilibria. Multiple equilibria and hysteresis. Krugman P., 1991, Increasing
Returns and Economic Geography, Journal of Political Economy,
vol. 99, 483-499. Krugman P., 1991, Geography and Trade, The MIT
Press. Krugman P., 1995, Development, Geography, and Economic
Theory, The MIT Press.
Economics of Innovations (1 lecture). Model of the
innovation process. Patent race. Market structure and innovation efforts.
Incentives for innovations. Socially optimal and market investments
into R&D. Patent life. Loury G.L., 1979, “Market structure and Innovation”,
Quarterly Journal of Economics, vol. XCIII, No. 3, 395-410. Tirole J.,
1988, The Theory of Industrial Organization, The MIT Press.
Imperfect Competition and Macroeconomics (1 lecture). Theories of business cycles.
Increasing returns to scale and stability of economic equilibrium.
Price rigidity as a source of business cycles. Explanations of price
rigidities: kinked demand curve, menu costs. Market monopolization
and price rigidity. Small menu costs and large business cycles during
economic booms and busts. Externalities, corrective taxes, and market structure.
Possibility of a negative effect of Pigou tax on public welfare under
monopoly. Mankiw G., 1985, Small Menu
Costs and Large Business Cycles: A Macroeconomic Model of Monopoly,
Quarterly Journal of Economics, vol. 100, 529-537. Buchanan J.M., 1969, External
Diseconomies, Corrective Taxes, and Market Structure, American
Economic Review, vol. 59, 174-177. Rotemberg J.J., and G. Saloner,
1987, The Relative Rigidity of Monopoly Pricing, American Economic
Review, vol. 77, 917-926.
Theory of Regulation (2 lectures). Public costs of monopoly.
Subadditivity of cost function – a necessary and sufficient condition
for a natural monopoly. Economy of scale, concavity of a cost function
and subadditivity. Stability
of a natural monopoly. History of regulation after World War II. When should natural
monopolies be regulated? Demsetz competition for a market. Contestability
of a market. Deadweight losses, sunk costs and regulation. Regulation under complete information.
Price discrimination and nonlinear tariffs as a means of increasing
efficiency of a regulated monopoly. Peak-load pricing. Regulating monopoly
under asymmetric information. Exogenous mechanisms of regulation.
Averch-Johnson model. Endogenous
mechanisms of regulation. The delegation and revelation approaches. Averch H., and L.L. Johnson,
1962, Behavior of the Firm under Regulatory Constraint, American
Economic Review, vol. 52, 1052-1069. Baron D., 1989, Design
of Regulatory Mechanisms and Institutions, in R. Schmalensee and
R.D. Willig eds.: The Handbook of Industrial Organization, Elsevier
North-Holland. Baumol W.J., J.C. Panzar,
and R.D. Willig, 1982, Contestable Markets and the Theory of Industry
Structure, New York: Harcourt Brace Jovanovich. Braeutigam
R., 1989, Optimal Policies for Natural Monopolies, in R. Schmalensee
and R.D. Willig eds.: The Handbook of Industrial Organization, Elsevier
North-Holland. Posner R.A., 1975, The Social
Costs of Monopoly and Regulation, Journal of Political Economy,
vol. 83, 807-827. Sharky W., 1982, The
Theory of Natural Monopoly, Cambridge University Press.
Analysis of Particular Industries and
Enterprises. Airlines (1 lecture) Effects of deregulating
air companies. “Hub and Spokes” system and its efficiency. Shy O., 1995, Industrial Organization, The MIT
Press.
Theatres and restaurants (1 lecture). Why in developed
market economies there are queues in theatres, restaurants, etc.?
Network externalities in services consumption and nonmonotonicity
of demand function. Instability of equilibrium, corresponding to profit
maximization, and limitedness of prices and supply of services. Becker G., 1991, A Note
on Restaurant Pricing and Other Examples of Social Influences on Price,
Journal of Political Economy, vol. 99, 1109-1116.
Economics of Show Business (1 lecture). Why
relatively small number of people in show business, sports, book publishing,
etc. earn a lot of money and dominate on markets? Effect of imperfect
substitution: lesser talent is a poor substitute of larger talent.
Dependence of demand function on quality. Increasing returns to scale
in show business production. Demand and supply structure. Market equilibrium. Convexity of
revenue function, depending on talent. Continuous distribution of
performers on talent, and rent dissipation. Outstanding performer
and rent value. Rosen S., 1981, The Economics
of Superstars, American Economic Review, vol. 71, 845-858.
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