UNIVERSITY OF WYOMING
COLLEGE OF BUSINESS
DEPARTMENT OF ECONOMICS AND FINANCE
Economics 5820
Advanced Industrial Organization and Public Policy
MW 3:10-4:25 p.m.
Fall Semester 2014
Instructor:
Office:
Telephone:
Office Hours:
E-Mail:
Fax:
Owen R. Phillips
BU 361
Office: 766-2195; Department: 766-2178
1:30 p.m. to 3:00 p.m. Monday and Wednesday and by appointment
[email protected]
766-5090
Course Description:
This course is an application of market and price theory. It covers market definitions, market concentration, competition,
entry deterrence, close-knit and loose-knit combination business practices, price leadership and discrimination, delivered
pricing, fair trade; antitrust and other unfair competition and public policy. As time permits we also study the effectiveness of
market institutions such as posted price, auctions, and private negotiation and the importance of information for these
institutions.
Prerequisites:
Econ 5010, 5020 or equivalent.
Course Objective:
You will become familiar with the organization of markets with particular emphasis on the firm. You will learn how firms
behave when competition is imperfect. At the graduate level you will be exposed to the literature on strategic behavior in
markets. We will study how public policies have developed to control anticompetitive business behavior. We also study this
policy for unregulated industries; this area of study is generally referred to as antitrust economics. Both fields have a large
literature. In one semester we will have time to only touch on selected topics, become familiar with selected parts of the
literature, and develop the basic economic theory.
Required Texts:
Oz Shy, Industrial Organization, MIT Press, 1995.
Jean Tirole, The Theory of Industrial Organization, MIT Press, 1988.
Recommended Readings:
F.M. Scherer and David Ross, Industrial Market Structure and Economic Performance, Houghton Mifflin, 1990.
Robert Gibbons, Game Theory for Applied Economists, Princeton, 1992.
Stephen Martin, Advanced Industrial Organization, Second Edition, Blackwell, 2002.
John Roberts, The Modern Firm, Oxford, 2004.
The reading list provided below is designed to expose you to some of the literature. It is not all required reading. Required
material that matches with the progression of lectures is provided as the course develops. It is important that you keep up
with all the assigned readings. The texts in particular do an excellent job of exposing you to the basics. An optional text that
provides an extensive survey of the literature is F.M Scherer and David Ross, Industrial Market Structure and Economics
Performance, Houghton Mifflin, 1990.
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Grading and Course Requirements:
There will be one midterm exam that will count 50 points toward your grade. Homework assignments will be given on a
regular basis. These will collectively count 50 points toward your grade. A final exam will be given at the end of the
semester; it will count toward 100 points of your grade. A ten page paper on a topic approved by the instructor is required.
Possible topics analyze the market structure of an industry, review the literature on a particular topic, or extend the work of a
paper you enjoyed reading. This is a wonderful opportunity that may lead to an M.S.thesis or Ph.D. dissertation. The paper
counts up to100 points of your grade. Final grades may have a plus (+) or minus (-) attached.
Attendance:
Attendance in all classes is required. In only rare cases are late papers accepted and make-up exams allowed.
Academic Dishonesty:
Also know as “cheating”, academic dishonesty will not be tolerated in this class. Cases of academic dishonesty will be
prosecuted in accordance with UNIREG 802 Rev. 2. Cheating in this course can result in an “F” in the course. In this course,
academic dishonesty includes (but is not limited to) unapproved assistance on examinations, copying the homework of others,
plagiarism or other use of published materials without complete citations, or fabrication or referenced information.
Group work Guidelines:
Students are encouraged to work in study groups on homework assignments and in preparing for exams.
Disclaimer:
Changes in exam dates scheduled lecture topics and homework assignments may occur. The homework schedule is
approximate. Changes will be announced in class.
1.
Introduction
1.1 Overview of Industrial Organization
Tirole (Ch 1, Sec 1).
Schmalensee, Richard, “Industrial Organization,” in The New Palgrave: A Dictionary of Economics.
Scherer, F.M. and Ross, David, Industrial Market Structure and Economic Performance, Third Edition,
Houghton Mifflin, 1990 (Chapters 1 and 2).
Shy (Ch 1).
Roberts, John, The Modern Firm, Oxford, 2004.
William M. Landes and Richard A. Posner, “Market Power in Antitrust Cases,” Harvard Law Review, 94(5), March
1981, pp. 937-996.
1.2 Game Theory Basics in Industrial Organization
Tirole (Ch 11, Sec 1-3).
Shy, (Ch 2).
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Gibbons (Chs 1-3).
2. Static Theories of Oligopoly
2.1 Quantity Competition
Tirole (Ch 5).
Shapiro, Carl, “Theories of Oligopoly Behavior,” Handbook of Industrial Organization, Elsevier, 1989.
Hotelling, H., "Stability in Competition," Economic Journal, Vol. 39, March 1929, pp. 41-57.
2.2 Price Competition with Homogeneous Products
Shy (Ch 6-7).
Tirole (Ch 2 and 7.1-7.2 and pp.205-208).
Kreps, David and Jose Scheinkman, “Quantity Precommitment and Bertrand Competition Yield Cournot
Outcomes,” Bell Journal of Economics, 14 (1983), pp. 326-37.
Spulber, Daniel, “Bertrand Competition when Rivals’ Costs are Unknown,” Journal of Industrial Economics,
43(1995), pp.1-11.
2.3 Oligopoly as a Game
Tirole (Ch 6).
Schelling, Thomas, The Strategy of Conflict, Harvard Press 1960.
Fudenberg, D. and Tirole, J., "Noncooperative Game Theory for Industrial Organization: An Introduction and
Overview," in R. Schmalensee and R. Willig, eds., Handbook of Industrial Organization, Vol. 1, Elsevier, 1989.
Friedman, J., Oligopoly and the Theory of Games, North-Holland, 1977.
3.
Strategic Behavior
3.1 Monopoly and Entry Deterrence
Baumol, W., "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review,
Vol. 21(1), March 1982, pp. 1-15.
Baumol, W., "On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry," American Economic
Review, Vol. 67(5), December 1977, pp. 809-22.
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Baumol, W., "Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing," Yale Law
Journal, Vol. 89(1), November 1979, pp. 1-26.
Baumol, W., Bailey, E., and Willig, R., "Weak Invisible Hand Theorems on the Sustainability of Multiproduct
Natural Monopoly," American Economic Review, Vol. 67(3), June 1977, pp. 350-65.
Shy (Ch5).
Panzar, J. and Willig, R., "Free Entry and the Sustainability of Natural Monopoly," Bell Journal of Economics, Vol. 8(1), Spring
1977, pp. 1-22.
Shepherd, W., "Contestability v. Competition," American Economic Review, Vol. 74(4), September 1984, pp. 57287.
Triole, (Chapter 1, 62-94).
3.2 Prices, Cost, and Entry Deterrence
Shy (Ch 8).
Bernheim, B. Douglas., "Strategic Entry Deterrence into an Industry," Rand Journal of Economics, Vol. 15(1),
Spring 1984, pp. 1-11.
Eaton, B.C. and Lipsey, R.G., “Exit Barriers Are Entry Barriers: the Durability of Capital as a barrier to Entry,” Bell
Journal of Economics, Vol. 11(2), Autumn 1980, pp. 721-729.
Dixit, A., "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, Vol.10(1),
Spring 1979, pp. 20-32.
Dixit, A., “Recent Developments in Oligopoly Theory,” American Economic Review, Vol. 72(2), May 1982, pp.
12-17.
Gaskins, D., "Dynamic Limit Pricing: Optimal Pricing Under Threat of Entry," Journal of Economic Theory, Vol.
3(3), September 1971, pp. 306-321.
Gelman, J. and Salop, S., “Judo Economics: Capacity Limitations and Coupon Competition,” Bell Journal of
Economics, Vol. 14(2), Autumn 1983, pp. 315-325.
Kreps, D., P. Milgrom, J. Roberts, and R. Wilson. "Rational Cooperation in the Finitely Repeated Prisoners'
Dilemma," Journal of Economic Theory, Vol. 27(2), August 1982, pp.245-52.
Mankiw, N. Gregory and Whinston, M., “Free Entry and Social Inefficiency,” Rand Journal of Economics, Vol. 17,
Spring 1986, pp. 48-58.
Milgrom, P. and Roberts, J., "Limit Pricing and Entry Under Incomplete Information," Econometrica, Vol. 50,
March 1982, pp. 443-469.
Milgrom, P. and Roberts, J., "Predation, Reputation, and Entry Deterrence," Journal of Economic Theory, Vol. 27,
August 1982, pp. 280-312.
Modigliani, F., "New Developments on the Oligopoly Front," Journal of Political Economy, Vol. 66(3), June 1958,
pp. 215-232.
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Salop, S. and Scheffman, D., "Raising Rival's Cost," American Economic Review, Vol. 73(2), May 1983, pp. 267271.
Shepherd, W., "Entry as a Substitute for Regulation," American Economic Review, Vol. 63(2), May 1973, pp. 98105.
Spence, A.M., "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, Vol. 8(2),
Autumn 1977, pp. 534-544.
Spence, A.M., "Investment Strategy and Growth in a New Market," Bell Journal of Economics, Vol. 10(1), Spring
1979, pp. 1-19.
Tirole (Ch 8-9, pp. 305-388).
3.3 Product Differentiation
Lovell, M., "Product Differentiation and Market Structure," Economic Inquiry, Vol. 8(2), June 1970, pp. 120-143.
Scherer, F., "The Welfare Economics of Product Variety: An Application to the Ready-to-Eat Cereal Industry,"
Journal of Industrial Economics, Vol. 28(2), December 1979, pp. 113-134.
Schmalensee, R., "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics,
Vol. 9(2), Autumn 1978, pp. 305-327.
Schmalensee, R., "Market Structure Durability and Quality: A Selective Survey," Economic Inquiry, Vol. 17(2),
April 1979, pp. 177-196.
Shy (Ch 7 and 12).
Spence, A.M., "Product Differentiation and Welfare, "American Economic Review, Vol. 66(2), May 1976, pp. 40714.
Whinston, M., "Tying Foreclosure, and Exclusion," American Economic Review, Vol. 80(4), September 1990, pp.
837-859.
3.4 Advertising and Information
Adams, W. and Yellen, J., "What Makes Advertising Profitable?" Economic Journal, Vol. 67(347), September
1977, pp. 427-49.
Akerlof, G., "The Market for Lemons," Quarterly Journal of Economics, Vol. 84(3), August 1970, pp. 488-500.
Arrow, K., "Vertical Integration and Communication," Bell Journal of Economics, Vol. 6(1), Spring 1975, pp. 17383.
Bagwell, K. and Ramey, G., “Coordination Economies, Advertising, and Search Behavior in retail Markets,”
American Economic Review, Vol. 84 (3), June 1994, pp. 498-517
Comanor, W. and Wilson, T., "The Effects of Advertising on Competition: A Survey," Journal of Economic
Literature, Vol. 17(2), June 1979, pp. 453-76.
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Dixit, A. and Norman, V., "Advertising and Welfare," Bell Journal of Economics, Vol. 9(1), Spring 1978, pp. 1-17.
Diamond, Peter, “A Model of Price Adjustment,” Journal of Economic Theory, Vol. 32(2), June 1971, pp. 156-68.
Grossman, S. and Stiglitz, J., "Information and Competitive Price Systems," American Economic Review, Vol.
66(2), May 1976, pp. 246-53.
Judd, K. and Riordan, M., “Price and Quality in a New Product Monopoly,” Review of Economic Studies, Vol 61(4),
October 1994, pp. 773-89.
Martin, S., Advanced Industrial Economics, Chapter 9.
Milgrom, P. and Roberts, J. “Price and Advertising Signals of Product Quality,” Journal of Political Economy, Vol.
94(4) August 1986, pp. 796-821.
Nelson, P., "Advertising as Information," Journal of Political Economy, Vol. 82(4), July/August 1974, pp. 729-54.
Rothschild, M., "Models of Market Organization with Imperfect Information: A Survey," Journal of Political
Economy, Vol. 81(6), Nov./Dec. 1973, pp. 1283-1308.
Shy (Ch 11 and 16).
Spence, A., "Notes on Advertising, Economies of Scale, and Entry Barriers," Quarterly Journal of Economics, Vol.
95(3), November 1980, pp. 493-508.
Stigler, G., "The Economies of Information," Journal of Political Economy, Vol. 69(3), June 1961, pp. 213-25; also
in The Organization of Industry, Irwin, Chapter 16.
Telser, L., "Advertising and Competition," Journal of Political Economy, Vol. 72(6), December 1964, pp. 537-562.
Tirole (Ch 2, pp. 95-132).
Wilson, R., "Informational Economies of Scale," Bell Journal of Economics, Vol. 6(1), Spring 1975, pp. 184-95.
4. Collusion
4.1 Tacit Agreement
Tirole (Ch 6).
Vives, X., Oligopoly Pricing, MIT Press, 1999, (Ch 9.1).
Abreu, Dilip, “Extremal Equilibria of Oligoplistic Supergames,” Journal of Economic Theory, Vol. 39(1), June
1986, pp. 191-225.
Abreu, Dilip, David Pearce and Ennio Stacchitti, “Optimal Cartel Equilibria with Imperfect Monitoring,” Journal of
Economic Theory, 39(1), June 1986, pp. 215-296.
Bernheim, B. Douglas and Michael D. Whinston, “Multimarket Contact and Collusive Behavior,” Rand Journal of
Economics, Vol. 21(3), Spring 1990, 1-26.
Corts, Kenneth S., “Conduct Parameters and the Measurement of Market Power,” Journal of Econometrics, Vol.
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88(2), 1999, pp. 227-250.
Green, R. and Porter, R., “Non-cooperative Collusion under Imperfect Price Information,” Econometrica, Vol.
52(1), January 1984, pp. 87-100.
Farrell, J. and Shapiro, C., “Dynamic Competition with Switching Costs,” Rand Journal of Economics, Vol. 19(1),
Spring 1988, pp. 123-137.
Harrington, Joseph E. Jr. and Andrezj Skrzypacz, “Collusion under Monitoring of Sales,” Rand Journal of
Economics, Vol. 38(2), Summer 2007, pp. 314-331.
Porter, Robert H., “Optimal Cartel Trigger Price Strategies,” Journal of Economic Theory, Vol. 29(2), 1983, pp.
313-338.
Rotemberg, Julio J. and Garth Saloner, “A Supergame-Theoretic Model of Price Wars During Booms,” American
Economic Review, Vol.76 (3), June1986, pp.390-407.
4.2
Hard-Core Cartels
Athey, Susan and Kyle Bagwell, “Optimal Collusion with private Information,” Rand Journal of Economics, Vol.
32(3), Winter 2001, pp. 428-465.
Bajari, Patrick and Lixin Ye, “Deciding Between Competition and Collusion,” Review of Economics and Statistics,
85 (2003), 971-989.
Baldwin, Laura H., Robert C. Marshall, and Jean Francois Richard, “Bidder Collusion at Forest Service Timber
Auctions,” Journal of Political Economy, 105 (1997), 657-699.
Harrington, Joseph E. Jr., “Cartel Pricing Dynamics in the Presence of an Antitrust Authority,” Rand Journal of
Economics, Vol. 35(4), Winter 2004, pp. 651-673.
Harrington, Joseph E. Jr. and Joe Chen, “Cartel Pricing Dynamics with Cost Variability and Endogenous Buyer
Detection,” International Journal of Industrial Organization, Vol. 24, November 2006, pp.1185-1212.
Harrington, Joseph E. Jr., “Detecting Cartels,” Handbook of Antitrust Economics, P. Buccirossi,
ed., The MIT Press, 2008.
Stigler, G., “A Theory of Oligopoly,” Journal of Political Economy, Vol. 72(1), February 1964, pp. 44-61.
5. Antitrust
5.1 Price Discrimination
Adams, W. and Yellen, J., "Commodity Bundling and the Burden of Monopoly," Quarterly Journal of Economics,
Vol. 90(3), August 1976, pp. 475-498.
Blair, R. and Kaserman, D., Antitrust Economics, Irwin, 1985, pp. 258-280.
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Burnstein, M., "The Economics of Tie-In Sales," Review of Economics and Statistics, Vol. 42(1), February 1960,
pp. 68-73.
Oi, W., "A Disneyland Dilemma: Two Part Tariffs for a Mickey Mouse Monopoly," Quarterly Journal of
Economics, Vol. 85(1), February 1971, pp. 77-96.
Philips, L., The Economics of Price Discrimination, Cambridge University Press, 1983.
Phillips, O. and Battalio, R. “Two-Part Tariffs and Monopoly Profits When Visits are Variable,” Bell Journal of
Economics, Vol. 14(2), Autumn 1983, pp. 601-4.
Roberts, K., "Welfare Considerations of Nonlinear Pricing," Economic Journal, Vol. 89(353), March 1979, pp. 6683.
Shy(Ch 13 and 14).
Tirole (Ch 3, pp. 133-168).
Williamson, O., "Predatory Pricing: A Strategic and Welfare Analysis," Yale Law Journal, Vol. 87(2), December
1977, pp. 284-340.
Willig, R., "Pareto Superior Nonlinear Outlay Schedules," Bell Journal of Economics, Vol. 9(1), Spring 1976, pp.
56-69.
Varian, H., “Price Discrimination and Social Welfare,” American Economic Review, Vol. 75(4), September 1985
pp. 870-5.
5.2 Vertical Integration and Restraints
Adelman, M., "The A & P Case: A Study in Applied Economic Theory," Quarterly Journal of Economics, Vol.
63(2), May 1949, pp. 238-57.
Baye, M., Crocker, K. and Ju, J., “Divisionalization, Franchising, and Divesture Incentives in Oligopoly,” American
Economic Review Vol. 86(3), March 1996, pp. 223-36.
Berry, C., "Corporate Growth and Diversification," Journal of Law and Economics, Vol. 14(2), October 1971, pp.
371-84.
Martin, S., Advanced Industrial Economics, Chapters 12 and 13.
Marvel, H. and McCafferty, S., "The Political Economy of Resale Price Maintenance," Journal of Political
Economy, Vol. 94(5), October 1986.
Schmalensee, R., "A Note of the Theory of Vertical Integration," Journal of Political Economy, Vol. 81(2),
March/April 1973, pp. 442-449.
Stigler, G., "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, Vol.
59(3), June 1951, pp. 185-93; also in The Organization of Industry, Irwin, chapter 12.
Tirole (Ch 4, pp. 169-203).
Vernon, J.M. and Graham, D.A., “Profitability of Monopolization by Vertical Integration,” Journal of Political
Economy, Vol. 79(4), July/August 1971, pp. 924-5.
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Warren-Boulton, F., "Vertical Control with Variable Proportions," Journal of Political Economy, Vol. 82(4),
July/August 1974, pp. 783-802.
Williamson, O., "The Economies of Antitrust: Transaction Cost Considerations," University of Pennsylvania Law
Review, Vol. 122(6), June 1974, pp. 1439-96.
Williamson, O., "The Vertical Integration of Production: Market Failure Considerations," American Economic
Review, Vol. 61(2), May 1971, pp. 122-127.
5.3 Multimarket Contact
Blair, R. and Kaserman, Antitrust Economics, Irwin, 1985, chapter 17.
Bulow, J., Geanakoplos, J., and Klemperer, P., “Multimarket Oligopoly: Strategic Substitutes and Complements,”
Journal of Political Economy Vol. 93(3), June 1985, pp. 488-511.
Goldberg, L., "The Effect of Conglomerate Mergers on Competition," Journal of Law and Economics, Vol. 16(1),
April 1973, pp. 137-158.
Phillips, O. and Mason, C., "Mutual Forbearance in Experimental Conglomerate Markets," Rand Journal of
Economics, Vol. 23(3), Autumn 1992, pp. 395-414.
Phillips, O. and Mason, C., “Market regulation and Multimarket Rivalry,” Rand Journal of Economics, Vol. 27(3),
Autumn 1996, pp. 596-617.
Mason, C. and Phillips, O., “Imminent Entry and the Transition to Multimarket Rivalry: Messy Markets in a
Laboratory Setting.” University of Wyoming Working Paper, August 2012.
5.4 Dominance
Bagwell, Kyle, Garey Ramey, and Daniel Spulber,. “Dynamic Retail Price and Investment Competition,”
Rand Journal of Economics, 28 (1997), 207-227.
Beggs, Alan and Paul Klemperer, “Multi-period Competition with Switching Costs,” Econometrica, 60 (1992), 651666.
Budd, Christopher, Christopher Harris, and John Vickers, “A Model of the Evolution of Duopoly: Does the
Asymmetry between Firms tend to Increase or Decrease?” Review of Economics and Statistics, 60 (1993), 543-573.
Cabral, Luis and Michael Riordan, “The Learning Curve, Market Dominance, and Predatory Pricing,”
Econometrica, 62 (1994), 1115-1140.
Katz, Michael and Carl Shapiro, “Network Externalities, Competition, and Compatibility, American Economic
Review, 75 (1985), 424-440.
6.
Additional Topics
6.1 Auctions
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Ashenfelter, O., “How Auctions Work for Wine and Art,” Journal of Economic Perspectives, Vol. 3(3), Summer
1989, pp. 23-36.
Cassidy, R., Auctions and Auctioneering, University of California Press, 1967.
Klemperer, P., “Auction Theory: A Guide to the Literature,” Journal of Economic Surveys, Vol. 13(3), July 1999,
pp. 227-86.
Milgrom, P., “Auctions and Bidding: A Primer,” Journal of Economic Perspectives, Vol. 3(3), Summer 1989, pp.
3-22.
Phillips, O., Menkhaus, D. and Coatney, K., “Collusive Practices in Repeated English Auctions: Experimental
Evidence on Bidding Rings,” American Economic Review, Vol. 93(3), June 2003, pp. 965-79.
6.2 Negotiations
Guhan, S., Negotiauctions, W.W. Norton, 2010.
Muthoo, A., Bargaining Theory with Applications, Cambridge University Press, 2002.
Phillips, O. and Menkhaus, D., “The Culture of Private Negotiations: Price Drift in Bilateral Bargaining,” Journal of
Economic Behavior and Organization, Vol. 76(3), December 2010, pp. 705-715.
Phillips, O., Menkhaus, D., Huang, S. and Ramey, M., “The Equity Factor in Private Negotiations,” University of
Wyoming Working Paper, August 2012.
6.3 Experiments in Industrial Organization
Grether, D. and Plott, C., “The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination
of the Ethyl Case,” Economic Inquiry, Vol. 22(4), October 1984, pp. 479-507.
Holt, C., “An Experimental Test of the Consistent-Conjectures Hypothesis,” American Economic Review, Vol.
75(3), June 1985, pp. 314-25.
Hong, J. and Plott, C., “Rate Filing Polices for Inland Water Transportation: An Experimental Approach,” Bell
journal of Economics, Vol. 13(1), Spring 1982, pp. 1-19.
Issac, R.M. and Smith, V.L., “In Search of Predatory Pricing,” Journal of Political Economy, Vol. 93(2), April
1985, pp. 320-45.
Kagel J. and Roth, A. “The Handbook of Experimental Economics, Princeton University Press, 1995, Chapter 5.
Mason, C. and Phillips, O., “Duopoly Behavior in Asymmetric Markets: An Experimental Evaluation,” The Review
of Economics and Statistics, Vol. 74(4), November 1992, pp. 622-670.
Phillips, O., Menkhaus, D. and Thurow, J., “The Small Firm in a Quantity Choosing Game: Some Experimental
Evidence,” Review of Industrial Organization, Vol. 38(2), February 2011, pp. 191-207.
Plott, C., “Industrial Organization Theory and Experimental Economics,” Journal of Economic Literature, Vol.
2(4), December 1982, pp. 1485-1527.
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