A. Bonanno
AEREC 536 Spring 2010
AEREC 536
Applied Industrial Organization and Food Marketing
The goal of the course is to expose PhD students to the modeling of non-competitive markets and to
familiarize themselves with state of the art methods used in the analysis of conduct and market performance in
such markets.
The theoretical models covered will include homogeneous and heterogeneous product oligopoly and oligopsony
models, both static and dynamic, including horizontal and vertical games to analyze the market conduct of food
manufacturers and retailers.
The empirical methods covered will include simultaneous equations, IV methods, discrete choice, and semiparametric methods. Published research articles that use advanced methods will serve as the course readings,
combined with “textbook” material from different sources (such as: Handbook of Industrial Organization;
Handbook of Econometrics; J. Tyrole “The Theory of Industrial Organization”; Perloff-Karp-Golan
“Estimating Market Power and Strategies” etc..). Students will be provided with scanner data to practice the
concepts learnt in class, via a series of applied assignments.
Your grade will be based on assignments, one exam and a term paper. In the term paper you will be asked to 1)
identify an economic problem coherent with the topics discussed in class; 2) choose an appropriate framework
(both theoretical and empirical) to analyze the problem identified; 3) develop an empirical model and 4) present
an econometric application of the proposed model (depending upon data availability).
Grading
 Assignments (30%) [6 of them; 5% each]
 Exam (30%)
 Research Paper (40%) [30% paper – 10% presentation]
What follows is a comprehensive reading list. Note that NOT all the papers listed will be covered in class. Also,
consider this list as flexible. If, during the semester, there is enough demand for going in depth on one particular
topic or for covering a specific paper/topic, the list will be adjusted accordingly.
Textbooks / Chapters
J. M. Perloff, Larry S. Karp, A. Golan. Estimating Market Power and Strategies (Paperback) Cambridge
University Press (June 18, 2007) - 352 pages
Reiss P., and F. A. Wolak. 2007. “Structural Econometric Modeling: Rationales and Examples from Industrial
Organization”. Handbook of Econometrics, Volume 6A. North-Holland Publisher. 4280-4415.
Blair R. D. and J. Harrison. 1993 “Monopsony Power and Antitrust” Princeton University Press.
Ackerberg D., C. L. Benkard, S. Berry and A. Pakes. 2007. “Econometric Tools for Analyzing Market
Outcomes.” Handbook of Econometrics, Volume 6A. North-Holland Publisher. 4171-4276.
Bresnahan, T. 1989. “Empirical Studies of Industries with Market Power” in R. Schmalensee and R. Willig,
eds., Handbook of Industrial Organization, Vol. 2. Amsterdam: North-Holland.
Kenneth Train, Discrete Choice Methods with Simulation, Cambridge University Press, 2003, e-book available
at http://elsa.berkeley.edu/books/choice2.html.
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AEREC 536 Spring 2010
Scherer, F. M. and D. Ross 1990. Industrial Market Structure and Economic Performance, 3rd edition, Houghton
Mifflin.
Tirole, J. The Theory of Industrial Organization (Cambridge, MA: MIT Press, 1988).
Suggested topics and comprehensive reading list
I.
Introduction - Empirical Analysis of Market Power: From IO to NEIO (Week 1 – Jan 12 and 14)
Bain, J. S. 1941. “The Profit Rate as Measure of Monopoly Power”, 1941 Quarterly Journal of Economics
Bain J. S. 1943. “Measurements of the Degree of Monopoly: A Note” Economica Vol (37) (Feb): pp. 66-68
Miller J. P. 1955. “Measures of Monopoly Power and Concentration: Their Economic Significance” in
Business Concentration and Price Policy; National Bureau of Economic Research Princeton University Press. (p.
117 - 138) available at http://www.nber.org/chapters/c0957
Fama, E. F. and A. B. Laffer, 1972. “The Number of Firms and Competition.” American Economic Review
September, 670-74.
Demsetz, H. 1973. “Industry Structure, Market Rivalry, and Public Policy,” Journal of Law and Economics, 16, 19.
Peltzman, S. 1977. “The Gains and Losses from Industrial Concentration,” Journal of Law and Economics, 20,
229–263.
Clark R. S. , D. Davies and M. Waterson 1984. “The Profitability-Concentration Relation: Market Power or
Eficciecy?” Journal of Industrial Economics 4, 435-450.
Bain J. 1986. “Structure versus Conduct as Indicators of Market Performance,” Antitrust Law and Econ Revew
II.
Why Studying Market Power? Principles of Antitrust Economics (Week 2 – Jan 19 and 21)
Federal Trade Commission “1992 Horizontal Merger Guidelines.” www.ftc.gov/bc/docs/horizmer.html.
National Association of Attorneys General, 1993 Horizontal Merger Guidelines. No. 256, March 30, 1993.
Commerce Clearing House, Inc., Chicago Illinois.
Blair R. D. and Harrison J. 1993 “Monopsony Power and Antitrust” Princeton University Press. Ch 1 and 2.
Gregory W. 1998. “Demand Elasticities in Antitrust Analysis.” Antitrust Law Journal, Vol. 66, p. 413.
Ivaldi, M., B. Jullien, P. Rey, P. Seabright, and J.Tirole. “The Economics of Unilateral Effects.” Interim Report
for DG Competition, European Commission, IDEI, Toulouse, November 2003.
http://ec.europa.eu/competition/mergers/studies_reports/the_economics_of_unilateral_effects_en.pdf
European Union, Commission Notice. “Guidelines on the Assessment of Horizontal Mergers under the
Council Regulation on the Control of Concentrations between Undertakings” January 30, 2004.
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2004:031:0005:0018:EN:PDF
FTC/DOJ Joint Workshop on Merger Enforcement, February 17-19, 2004.
http://www.ftc.gov/bc/mergerenforce/presentations/index
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III.
AEREC 536 Spring 2010
Structural Modeling of Homogenous Products Markets
(Week 3 – Jan 26 and 28)
Appelbaum, E. 1982. “The Estimation of the Degree of Oligopoly Power” Journal of Econometrics, 19, 287–299.
Bresnahan, T. 1989 “Empirical Studies of Industries with Market Power” in R. Schmalensee and R. Willig,
eds., Handbook of Industrial Organization, Vol. 2. Amsterdam: North-Holland.
Durham, C. and R. J. Sexton. 1992. Oligopsony Potential in Agriculture: Residual Supply Estimation in
California’s Processing Tomato Market. American J. of Ag Economics. 74:962-972.
Azzam, A. M. 1997. “Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration,”
Journal of Industrial Economics, 45, 377–386.
Schroeter J. R., A. M. Azzam, and M. Zhang. 2000. “Measuring Market Power in Bilateral Oligopoly: The
Wholesale Market for Beef” Southern Economic Journal, vol. 66(3), pages 526-547, January.
Lopez, R.; A. Azzam and C. Liron Espana. 2002. “Market Power and/or Efficiency: A Structural Approach”
Review of Industrial Organization 20: 115–126.
Bonanno, A. and R. Lopez. 2008. “Wal-Mart’s Monopsony in Local Labor Markets.” Working Paper, Food
Market Policy Center, Research Report n. 98. The University of Connecticut.
Shi, G. J.P. Chavas, K. Stiegert. 2008. “An Analysis of Bundle Pricing: The Case of the Corn Seed Market.”
Food System Research Group Working Paper 2008-01. University of Wisconsin-Madison
www.aae.wisc.edu/fsrg
IV.
Oligopoly with differentiated Products
(Week 4 – Feb 2 and 4)
Deneckere, R. and C. Davidson. 1985. “Incentives to Form Coalitions with Bertrand Competition,” Rand Journal
of Economics, Vol. 16, No. 4, winter 1985, p. 473-486.
Bresnahan T. F. 1987. “Competition and collusion in the American automobile industry: the 1955 price
war.” Journal of Industrial Economics, 35(4):457-82.
Klemperer, P. 1987. “The Competitiveness of Markets with Switching Costs” RAND Journal of Economics,
18(1): 138-150
Genovese and W. P. Mullin .1998. “Testing Static Oligopoly Models: Conduct and Cost in the Sugar
Industry, 1890-1914” The RAND Journal of Economics. 29 (2):355-377
Baker J. and T. F. Bresnahan T. F. 1988. “Estimating the Residual Demand Curve Facing a Single Firm”
International Journal of Industrial Organization, vol. 6, pp. 283-300.
Gasmi, F., J. J. Laffont, and Q. H. Voung. 1990. “A structural approach to empirical analysis of collusive
behavior.” European Economic Review. 34:513-523.
Cotterill, R. W. and P. O. Samson. 2002. “Estimating a Brand Level Demand System for American Cheese
Products to Evaluate Unilateral and Coordinated Market Power Strageties,” American Journal of Agricultural
Economics, 84 (3): 817-823.
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AEREC 536 Spring 2010
Dhar T. , J. P. Chavas, R. W. Cotterill and B. W. Gould 2005. “An Econometric Analysis of Brand-Level
Strategic Pricing between Coca-Cola Company and PepsiCo.” Journal of Economics & Management Strategy, 14
(4): 905–931.
Canan, Basak, and Ronald W. Cotterill. 2006. “Strategic Pricing in a Differentiated Product Oligopoly Model:
Fluid Milk in Boston.” Agricultural Economics. 35(1):27-33, July 2006.
V.
Entry
(Week 5 – Feb 9 and 11)
Bain, J. “Conditions of Entry and the Emergence of Monopoly”, 1954, in Chamberlin, editor, Monopoly and
Competition
Nahata B. and D. O. Olson 1989. “On the Definition of Barriers to Entry” Source: Southern Economic Journal 56
(1) pp. 236-239
Bresnahan T. and P. C. Reiss 1990. “Entry in monopoly markets”. Review of Economic Studies, 57(4):531–553.
Cotterill R. W. and L. E. Haller 1992. “Barrier and Queue Effects: A Study of Leading U.S. Supermarket Chain
Entry Patterns" Journal of Industrial Economics, Vol. 40, No. 4, pp. 427-440.
Berry, S. 1992. “Estimation of a model of entry in the airline industry.” Econometrica, 60(4):889–917.
Mazzeo, M. J. 2002. “Product choice and oligopoly market structure.” RAND Journal of Economics, 33(2):221–
242.
Seim, K. 2006. “An Empirical Model of Firm Entry with Endogenous Product –Type Choices.” The RAND
Journal of Economics, 37, 619-640.
Berry P. and S. Reiss 2007. “Empirical models of Entry and Market Structure” Handbook of Industrial
Organization, Vol. 3. Princeton University. Chapter 28 – pg 1845:1886.
Jia, P. 2008. “What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retail
Industry” Econometrica
VI.
Endogenous Cost Models and Market Structure
(Week 6 – Feb 16 and 18)
Shaked, A., and J. Sutton. 1987. “Product Differentiation and Industrial Structure.” Journal of Industrial
Economics 36(2):131–46.
Roller, L. H., and R.C. Sickles. 2000. “Capacity and Product Market Competition: Measuring Market Power in
a “Puppy-Dog” Industry.” International Journal of Industrial Organization 18:845–65.
Berry S. and J. Waldfogel 2006. “Product Quality and Market Size” Discussion paper No 1. Working Papers
on Economic Applications and Policy Yale University
Ellickson. P. 2007 “Quality Competition in Retailing: A Structural Analysis” International Journal of
Industrial Organization, 24(3), pp. 521-540, 2006.
Sutton J. 2007. “Market Structure: Theory and Evidence.” Handbook of Industrial Organization, Vol. 3. Princeton
University, 2007. Chapter 28 – pg 2301:2368.
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VII.
AEREC 536 Spring 2010
Differentiated Products’ Demand Models and Market Structure
1. Representative consumer models
(Week 7– Feb 23 and 25)
Hausman, J. A., G. Leonard, J. D. Zona. 1994. “Competitive Analysis with Differentiated Products.” Annales
d’Economía et. de Statiatique, vol. 34, 1994.
Hausman, J. A. and G. K. Leonard. 2005. “Competitive analysis using a flexible demand specification.” Journal
of Competition Law and Economics 1(2): 297-301.
Cotterill R. W., W. J. Putsis and R. Dhar 2000. “Assessing the Competitive Interaction between Private
Labels and National Brands” Journal of Business, 73(1): 109-37.
2. Semi-parametric products’ space approach
(Week 8 – March 2 and 4)
Pinkse J., M. Slade and C. Brett. 2002. “Spatial Price Competition: A Semiparametric Approach” Econometrica,
Vol. 70, No. 3, pp. 1111-1155.
Pinkse J. and M. Slade. 2004. “Mergers, Brand Competition, and the Price of a Pint” European Economic
Review, Vol. 48, pp. 617-643.
Slade M. 2005. “The Role of Economic Space in Decision Making,” Annales d'Economie et de Statistique,
Vol. 77, No. 1, pp. 1-21.
Rojas, C. 2008. Price Competition in U.S. Brewing. 2008. Journal of Industrial Economics, 56, 1-31.
Rojas, C. and E. Peterson. 2008. “Demand for Differentiated Products: Price and Advertising Evidence from
the U.S. beer Market.” International Journal of Industrial Organization, 26, 288-307.
Pofahl, G. M and T. Richards. 2009. “Valuation of New Products in Attribute Space". American Journal of
Agricultural Economics, 91 Issue 2: 402-415.
3. Discrete choice models
(Weeks 9 and 10 – March 16, 18, 23, and 25 )
Berry, S. 1994. “Estimating Discrete-Choice Models of Product Differentiation,” Rand Journal of Economics, 25,
242-262.
Berry, S., Levinsohn, J., and A. Pakes. 1995. “Automobile Prices in Market Equilibrium,” Econometrica, 63, 841889.
Rasmusen E. 2007. “The BLP Method of Demand Curve Estimation in Industrial Organization.” Class notes
- Kelley School of Business, Indiana University. Available at http://www.rasmusen.org/papers/blprasmusen.pdf.
Nevo, A. 2000. A Practitioner’s Guide to Estimation of Random-Coefficients Logit Models of Demand,
http://rasmusen.org/g604/readings/Nevo00.pdf.
Nevo A. 2001. “Measuring Marketing Power in the Ready-To-Eat Cereal Industry.” Econometrica, 69, 307-342.
Petrin, A. 2002. “Quantifying the benefits of new products; the case of the minivan”, Journal of Political
Economy 110, 705–729.
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A. Bonanno
AEREC 536 Spring 2010
Berry, S., Levinsohn, J., and A. Pakes 2004. “Differentiated Products Demand Systems from a Combination of
Micro and Macro Data: The New Car Market” Journal of Political Economy
McFadden, D. (1981). “Econometric Models of Probabilistic Choice,” in C. Manski and D. McFadden, eds.,
Structural Analysis of Discrete Data, pp. 198-272, Cambridge” MIT press.
Petrin A. and K. Train, (forthcoming) “A Control Function Approach to Endogeneity in Consumer Choice
Models,” forthcoming, Journal of Marketing Research
Di Giacomo M. 2008. “GMM Estimation of a Structural Demand Model for Yogurt and the Effects of the
Introduction of New Brands” Empirical Economics, 34(3), p. 537-565.
VIII.
Vertical Relationships and Market Conduct
(Week 11 – March 23 and 25)
Draganska, M. and J.Dipak 2006. “Consumer Preferences and Product-line Pricing Strategies: An Empirical
Analysis”, Marketing Science, vol. 25, No. 2, pp. 164-174
Villas-Boas S. B. 2007. “Vertical Relationships between Manufacturers and Retailers: Inference with Limited
Data.” The Review of Economic Studies Vol. 74, 2, pp. 625-652.
Draganska M., D. Klapper and S. B. Villas-Boas. 2007. “Determinants of Margins in the Distribution Channel:
An Empirical Investigation” Stanford University Graduate School of Business Research Paper No. 1959.
Hastings, J. 2004. “Vertical Relationships and Competition in Retail Gas Markets: Empirical Evidence from
Contract Changes in Southern California.” American Economic Review, 94 (1): 317-328.
Houde J. F. 2009. “Spatial differentiation and vertical contracts in retail markets for gasoline.” University of
Wisconsin-Madison Economics Working Paper. June 3, 2009
Kadiyali V., P. Chintagunta, and N. Vilcassim. 2000. “Manufacturer-Retailer Channel Interactions and
Implications for Channel Power: An Empirical Investigation of Pricing in a Local Market” Marketing Science 19
2: 127-148.
IX.
Dynamic models
1. Limitations and advances in dynamic empirical IO models
(Week 12 – March 30, April 1)
Richards, T. J., P. M. Patterson, and R. N. Acharya. 2001 “Price Behavior in a Dynamic Oligopsony:
Washington Processing Potatoes” American Journal of Agricultural Economics 83, (2): 259 – 271.
Doraszelski U. and A. Pakes. 2007. “A Framework For Applied Dynamic Analysis in IO.” Handbook of Industrial
Organization, Volume 3. North-Holland Publisher. 1887-1966.
Hendal, I. and A. Nevo 2006. “Measuring the Implications of Sales and Consumer Inventory Behavior.”
Econometrica, 74(6), 1637-1673.
2. Dynamic models of advertising
(Week 13 – April 6 and 8)
Milgrom, P. R. and J. Roberts 1986. “Price and advertising signals of product quality.” Journal of Political
Economy 94, 796-821.
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A. Bonanno
AEREC 536 Spring 2010
Slade, M.E. 1995. “Product Rivalry with Multiple Strategic Weapon: An Analysis of Price and Advertising
Competition.” Journal of Economics and Management Strategy 4:445– 76.
Beck G. S. and K. M. Murphy 1993. “A Simple Theory of Advertising as a Good or Bad.” Quarterly Journal of
Economics. 108 (4): 941-964.
Dube J.P. , G. J.Hitsch and P. Manchanda 2005. “An Empirical Model of Advertising Dynamics.” Quantitative
Marketing and Economics, 3, 107–144.
Bagwell, K. 2007. “The Economic Analysis of Advertising.” Handbook of Industrial Organization, Vol. 3, 2007.
Princeton University, 2007. Chapter 28 – pg 1701:1844.
Slade, M. and J. Pinkse 2007. “Semi-Structural Models of Advertising Competition,” Journal of Applied
Econometrics, Vol. 22 No. 7 December 2007, 1227—1224.
Robert C., U. Doraszelski, and M. Draganska 2009. “The Effect of Advertising on Brand Awareness and
Perceived Quality: An Empirical Investigation Using Panel Data“, Quantitative Marketing and Economics, vol. 7.
No. 2, pp. 207-236
X.
IO “Outside the Box” – Using IO to address Emerging Issues (Week 14 – April 13 and 15)
Richards,T., P. Patterson, and A. Tegene. 2007 “Obesity and Nutrient Consumption: A Rational
Addiction?” Contemporary Economic Policy Contemporary Economic Policy Vol. 25, (3):309–324.
Bonanno A., and R. Huang (…) “Healthy Food for Healthy People; Consumers’ Health and Demand for
Health–Enhancing Food Products”
Dunne T., S. D. Klimek M. J. ,Roberts, and X., Yi 2007. “The Dynamics of Market Structure and Market
Size in Two Health Services Industries” New York University.
Rosenthal, M. B., B. E. Landon, and H. A. Huskamp. 2001. “Managed Care and Market Power: Physician
Organizations n Four Markets” Health Affairs, 187-193.
Ellison G. and S. F. Ellison 2004. - Industrial Organization: Lessons from the Internet. http://econwww.mit.edu/files/994
Savage S. J. and D. M. Waldman 2009. “Ability, location and household demand for Internet Bandwidth”
International Journal of Industrial Organization 27 (2): 166-174
Ellison S. F. and C. M. Snyder 2008. “Countervailing Power in wholesale Pharamaceuticals” http: //econwww.mit.edu/files/992
Chen, Z. 2003. “Dominant Retailers and the Countervailing-Power Hypothesis” The RAND Journal of
Economics, 34 (4): 612-625.
Dobson P. W. and R. Inderst 2007 “Differential Buyer Power and the Waterbed Effect: Do Strong Buyers
Benefit or Harm Consumers?” Working Paper
Engle-Warnick J., B.J. Ruffle, 2002. “Buyer countervailing power versus monopoly power: evidence from
experimental posted- Offer Markets” working paper - econ.bgu.ac.il
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A. Bonanno
AEREC 536 Spring 2010
Week 15 – April 20 and 22 – Exam
Week 16 – April 27 and 29 – Papers and Presentations
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