Industrial Organization

Course description

The course combines the modern theories with empirical evidence about the organization of firms and industries. In this course, we discuss the strategic behavior of firms creating and maintaining market power, imperfectly competitive markets, industries' contributions to economic welfare and government regulatory policy.

Topics

Topic 1. Differentiated products markets

• Product differentiation models. Non-address and address (location) approaches to modeling differentiated-products industries. Quantity and price competitions in differentiated products. The concepts of strategically substitutes and strategically complements best-response functions. Sequential-moves games. Monopolistic-competition environment. Horizontal differentiation: Hotelling's linear city model (linear and quadratic transportation costs). Horizontal differentiation: Salop’s circular city. Equilibrium and socially optimal number of brands.

Topic 2. Price discrimination

• Examples of price discrimination. Mechanisms for capturing surplus. Market power and arbitrage: necessary conditions for price discrimination. Types of price discrimination. Perfect (first-degree) price discrimination. Multimarket (third-degree) price discrimination. The inverse-elasticity rule. Personal arbitrage and screening (second-degree price discrimination). Non-linear pricing.

Topic 3. Entry barriers

• Taxonomy of entry-related strategies. The role of fixed and sunk costs in entry barriers generation. Entry deterrence. Entry accommodation. Capacity commitment. Incumbent’s profit levels and capacity choices for different levels of entry cost. Limit pricing as cost signaling. Foreclosure strategies.

Topic 4. Research and development (R&D)

• Basic concepts. R&D types: process innovation and product innovation. Classifications of process innovation. Innovation race: memoryless and cumulating experience models. Equilibrium and society’s optimal R&D level. R&D joint ventures. Noncooperative and cooperative R&D. Patents. Innovator’s choice of R&D level for a given duration of patents. The calculation of the optimal patent life. Licensing.

Topic 5. Standards and compatibility

• Basic definitions. The significance of the standard choice on the profits of firms in a certain industry and on consumers' welfare. The basic network-externality model. The demand for communication services. The problem of the monopoly firm providing phone services. Network effects in the presence of various service types. Efficiency of brand adoption from the position of social welfare. The supporting services. Network effects without network externalities. The concept of partial compatibility. The components approach. Compatibility vs. incompatibility.

Topic 6. Advertising

• Major issues. Search goods and experience goods. Types of advertising. Persuasive advertising: Dorfman–Steiner condition. The calculation of the socially optimal level of persuasive advertising. Informative advertising. Socially optimal advertising level in the case of imperfect advertising technologies. Targeted advertising. Comparison advertising. Advertising and quality. Advertising and prices. Advertising regulations. Russian Federal law on advertising.

Topic 7. Quality. Durability. Warranties

• The effect of personal income on quality purchase (basic models). Quality as vertical product differentiation. Modified Hotelling vertical-differentiation model. The relationship between the degree of a firm’s monopoly power and the quality/durability of products produced. The Swan's independence result. A «light bulb» illustration. Durability, innovation and welfare. Social point of view on excess product durability. Quality-signaling games. Warranties under symmetric and asymmetric information. Warranty as a signal.

Topic 8. Monitoring. Management. Government regulation

• The principal–agent problem. Providing economic incentives under certainty and uncertainty. The principal–agent problem under asymmetric information. Joint production in teams. Incentives to managers. Government regulation of industries.

Literature

• Belleflamme P., Peitz M. Industrial Organization: Markets and Strategies. Cambridge: Cambridge University Press, 2010.
• Carlton D., Perloff J. Modern Industrial Organization. 3rd ed. Reading, Mass.: Addison-Wesley, 2000.
• Church J., Ware R. Industrial Organization. A strategic approach. New York: McGraw-Hill Companies, 2000.
• Shy О. Industrial Organization. Cambridge, Mass.: MIT Press, 1996.