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Industrial Organization

Purpose of Course  showclose

This course surveys major topics and theories in the field of Industrial Organization.  As part of the applied microeconomics structure, Industrial Organization uses the basic tools of microeconomic theory and game theory to study the structure and behavior of firms and their strategic interactions with one another in the marketplace.  Industrial Organization also studies the impact that those interactions have on market structure and welfare.

Different kinds of market structures (perfect competition, imperfect competition, monopoly, oligopoly, and so forth) present different scenarios in which firms strive to acquire and use market power for their strategic advantage.  While perfect competition and monopoly are two market structures on opposite ends of the spectrum, imperfect competition—where a limited number of firms attempt to manipulate their rivals or consumers—is a more realistic set-up.  This course will emphasize market structure analysis and the strategic behaviors of competing firms, including (but not limited to) product differentiation, collusion, price discrimination, pricing strategy, non-price discrimination (i.e. advertising), horizontal mergers, vertical integration, and vertical restraints.

Industrial Organization also examines the public policies that affect the structure of markets and the behavior of firms.  The government’s role as a regulator, working to prevent monopolization and restraint of trade, has been a constant topic of study in and of itself.  Although this course will introduce Antitrust Laws in the above context, it will not delve into the regulatory implications or the welfare analyses of firms’ strategic behaviors, as those subjects belong to more advanced Industrial Organization modules.  By the end of this course, you will be able to understand, analyze, and evaluate the basic theoretical models that define the behavior of firms and industrial organization more generally.  You will also learn the game theory approach to some of these models.  While emphasizing theory, the lessons in this course will include empirical studies that will provide you with a deeper understanding of the topic.  This should enable you to apply the theory you have learned to real world examples.

This course requires you to have completed the Principles of Microeconomics course and Calculus I.  You should also have a basic understanding of game theory prior to enrolling in this course.

Course Information  showclose

Course Information
Welcome to ECON306. Below, please find general information on the course, including its requirements.
 
Course Designer: Jubeet Kaur Singh
 
Primary Resource: The study material for this course includes a range of free online content. However, the initial part of the course assigns chapters mainly from the following text:
Berkeley Electronic Press: Jeffrey R. Church and Roger Ware’s Industrial Organization: A Strategic Approach
 
You will need to download the PDF file of the book by clicking on the "Download" tab on the right hand side of the webpage.  Please note that the PDF file of this book will be used repeatedly in this course, so you may want to save this file. 
 
Requirements for completion: In order to successfully complete this course, you will need to work through each unit and its assigned material, in the order they are presented.  Please note that each chapter in this course provides a comprehensive discussion of the topic along with examples and in order to fully understand the material, it is essential to practice the  problems on your own.
 
Note that you will be officially graded only for the final exam.  In order to "pass" the course, you will have to attain a minimum of 70% on the Final Exam.  Your score on the final exam will be tabulated as soon as you complete it.  You will have the opportunity to retake the exam if you do not pass it.
 
Time Commitment: This course should take you approximately 76 hours to complete.  A time advisory is presented under each subunit to guide you on the amount of time that you are expected to spend in going through the lectures.  Please do not rush through the material to adhere to the time advisory.   You can look at the time suggested in order to plan out your week for study and make your schedule accordingly.
 
Tips/Suggestions: The theoretical concepts presented in this course are pretty simple and logical and what makes this course extremely interesting is its connection to the real world.  Although it is important to learn the theory behind every topic, it is more important to relate it to case studies and to the way firms operate in a market.  The learning from this course would greatly benefit you if you form a regular habit of reading news articles relevant to the business issues covered in the course and important economic and policy changes what affect the behavior of firms.  Good sources are The Wall Street Journal, New York Times, The Economist, and Business Week.   

Learning Outcomes  showclose

Upon successful completion of this course, students will be able to:


  • Identify different theories of the firm.
  • Describe the different market structures under which firms operate, with particular emphasis on concentration and monopoly power as well as oligopoly.
  • Analyze how market structures impact the behavior of firms.
  • Identify and compare the anti-competitive pricing strategies that firms adopt under various market structures.
  • Use the theoretical insights presented in this course to explain observed features of particular markets and industries.
  • Apply a deepened knowledge of game theory to understand the strategic behavior of firms in the market.
  • Determine the factors that influence the firm’s decision-making over time.
  • Critically analyze the role of the government in regulating industries and the subsequent implications of public regulation.

Course Requirements  showclose

In order to take this course, students must:

√     Have access to a computer

√     Have continuous broadband Internet access

√     Have the ability/permission to install plug-ins (e.g. Adobe Reader or Flash) and software

√     Have the ability to download and save files and documents to a computer

√     Have the ability to open Microsoft files and documents (.doc, .ppt, .xls, etc.)

√     Have competency in the English language 

√     Have completed ECON101 and ECON103/MA101

√    Have read the Saylor Student Handbook.

Unit Outline show close


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  • Unit 1: The Field of Industrial Organization  

    The most basic questions that concern the field of Industrial Organization are: How do firms acquire market power?  How do firms use market power?  What are the implications of market power?  And can public policy limit unrelenting growth of market power?  This section of the course will address the systematic frameworks in which the theory of markets and the behavior of firms can be studied.  

    Unit 1 Time Advisory   show close
    Unit 1 Learning Outcomes   show close
  • 1.1 What Is Industrial Organization?  
  • 1.2 Methodologies in Industrial Organization  
  • 1.2.1 The Structure-Conduct-Performance Paradigm  

    Note: This is the traditional approach to studying Industrial Organization.  This approach dominated the field from the 1940s to the 1960s, but by the early '70s, a new approach, called the "new industrial economics," gained popularity.  While the former approach was more empirical and linked common elements of market structure observed across industries to their conduct and performance, the latter approach emanated based on the need to develop and test theoretical models of firm conduct.  

  • 1.2.2 The New Industrial Organization  
  • 1.3 Methodologies in Industrial Organization  
  • 1.3.1 The New Industrial Organization  

    Note: This subunit is covered by the reading assigned under Unit 1.2. 

  • 1.3.2 The Theory of Business Strategy  

    Note: This subunit is covered by the reading assigned under Unit 1.2. 

  • 1.3.3 Antitrust Law  

    Note: This subunit is covered by the reading assigned under Unit 1.2. 

  • 1.4 Topics in Industrial Organization  

    Note: In this section, you will read a brief overview of the topics we will study in this course. 

  • Unit 2: MARKET STRUCTURES AND WELFARE MEASURES  

    In this section, we will review different market structures and their characteristics.  At this point in the course, it is important to recall how firms set their prices under each market structure in order analyze the degree of market power that they wield in different kinds of markets.  We will also study Industrial Concentration, its causes, and its consequences, as well as learn about the index used to measure the level of concentration in an industry. 

    Unit 2 Time Advisory   show close
    Unit 2 Learning Outcomes   show close
  • 2.1 Perfect Competition and Its Efficiency  
  • 2.2 Monopoly Pricing and Its Inefficiency  
  • 2.3 Monopolistic Competition and Product Differentiation  
  • 2.4 Oligopoly Markets  
  • 2.5 Industrial Concentration  
  • 2.5.1 Determinants of Concentration  

    Note: This subunit is covered by the reading assigned under Unit 2.5. 

  • 2.5.2 Measurements of Concentration- The Lerner Index  

    Note: This subunit is covered by the reading assigned under Unit 2.5. 

  • 2.5.3 Consequences of Industrial Concentration  

    Note: This subunit is covered by the reading assigned under Unit 2.5. 

  • Unit 3: Theory of the Firm  

    In order to understand the mechanics of Industrial Organization, you must have a solid grasp of microeconomic concepts, especially that of competitive markets.  We will therefore begin by reviewing some principles of microeconomics.  Even if the material seems familiar, take your time reviewing it to ensure you fully grasp the particulars of each concept.  
    The first part of this section will focus on the neoclassical theory of the firm that was taught in the principles course and introducing you to some new concepts.  We will revisit marginal cost and average cost functions, both in the short run as well as in the long run.  The course will then present "Economies of Scale" in order to review the relationship between long run average costs and output.  "Economies of Scope," a concept that explains the existence of multiproduct firms, will also be discussed.   Finally, we will learn about seller concentration, which will likely be new to you.
    The second part of this section will introduce an alternate theory of the firm that was developed in order to counter the neoclassical theory of firm behavior.  The neoclassical theory of firm behavior asserts that the firm's existence is a paradox because optimal outcomes can be costless and can be efficiently achieved through the price mechanism, or the "invisible hand."   The Transaction Cost Approach to the Theory of the Firm (attributed to Ronald Coase), on the other hand, contends that there are costs involved in operating the market.  The firm itself is an example of one of these costs.  Thus, in order to fully understand the working of the economic system or establish sound economic policy, one must account for so-called "transaction costs."  

    Unit 3 Time Advisory   show close
    Unit 3 Learning Outcomes   show close
  • 3.1 Perfect Competition and Its Efficiency  
  • 3.1.1 Nature of the Firm  
  • 3.1.2 Review of Cost Functions  

    Note: This subunit is covered by the reading assigned under Unit 3.1.

  • 3.1.3 Economies of Scale  

    Note: This subunit is covered by the reading assigned under Unit 3.1. 

  • 3.1.4 Economies of Scope  

    Note: This subunit is covered by the reading assigned under Unit 3.1. 

  • 3.1.5 Seller Concentration  

    Note: This subunit is covered by the reading assigned under Unit 3.1. 

  • 3.2 Monopoly Pricing and Its Inefficiency  
  • Unit 4: Monopoly  

    A market with a single seller of a product or service has an obvious advantage in pricing, thus posing a persistent threat to desirable competitive outcomes.  In this unit, we will identify the possible sources of market power, including scale economies and network organization, both of which are advantageous to a firm seeking to establish monopoly.  Entry barriers also foster monopoly by keeping potential competitors out, while patents enable firms to enjoy exclusive rights as a reward for the discovery of an idea and can often result in monopoly as well.  After discussing the sources of monopoly, we will study monopolistic pricing strategies. 

    Our study of price discrimination in a single product monopoly context will shed light on how monopolists can charge one consumer one price and another consumer another price, even though the cost of producing the good or serving the consumer remains the same.

    We will then take a look at instances where a multi-product firm has monopoly in one product; in these situations, the consumer might be forced to buy another product (or products), because the firm has tied it to the monopolized one.  For example, when selling a camera, the buyer has to agree to pay for the film as well.  Another way for a multiproduct firm to offer its monopolized good is by bundling them together.  Microsoft, for example, bundled Internet Explorer with the Windows Operating System, although the internet browser did not appear to generate revenues directly, because it was bundled at no extra cost.  However, Microsoft did achieve its goal of establishing a strong position for itself in the browser market.  It was later penalized for this action on the grounds of violating antitrust laws.

    Unit 4 Time Advisory   show close
    Unit 4 Learning Outcomes   show close
  • 4.1 Market Power  
  • 4.1.1 Price Setting Behavior in the Presence of Market Power  

    Note: This subunit is covered by the reading assigned under Unit 4.1. 

  • 4.1.2 Determinants of Market Power  

    Note: This subunit is covered by the reading assigned under Unit 4.1.

  • 4.1.3 Sources of Market Power  
  • 4.1.3.1 Entry Barriers by the Government  

    Note: This subunit is covered by the reading assigned under Unit 4.1.3. 

  • 4.1.3.2 Structural Characteristics  
  • 4.1.3.3 Entry Deterrence by Incumbents  
  • 4.2 Pricing Strategies  
  • 4.2.1 Single Price  

    Note: This subunit is covered by the reading assigned under Unit 4.2. 

  • 4.2.2 Price Discrimination and Non-Linear Pricing  
  • 4.2.2.1 Examples of Price Discrimination  

    Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

  • 4.2.2.2 Necessary Conditions  

    Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

  • 4.2.2.3 Types of Price Discrimination  

    Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

  • 4.2.2.4 Non-Linear Pricing  

    Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

  • 4.2.3 More on Pricing Strategies  
  • Unit 5: Models of Oligopoly  

    The behavior of firms in oligopoly continues to pique the interest of researchers, scholars, and students alike, who have generated numerous models to study the strategy of firms and their competitors in oligopolistic competition.  Please note that different models apply to different situations; in this regard, no one model can be deemed “better” than the other.  This section will introduce you to some of the first models of oligopoly that were built using the tools of noncooperative game theory.  The Cournot and Bertrand models presented here are known as static games of complete information, while the Stackelberg model belongs to the category of dynamic games.  Static and dynamic games are explained below.

    A note on Game Theory: Game theory involves the process of strategic decision-making.   A game theoretic situation arises when the payoffs (profits) arising from the optimal choice made by a firm (or any agent) depends on the actions taken by others.  This is also called "payoff interdependency."   If the agent recognizes this interdependent decision-making, his optimal choice will be based on his expectations about the choices that others playing the "game” will make.  "Static games" are simultaneous move games in which each player moves once, not knowing the action of his or her rivals.  These games are sometimes also called "strategic games."   In a "dynamic game," players move sequentially with some knowledge of the actions taken by othersSuch games are often called "extensive games."

    Both static and dynamic games can also be distinguished in terms of the level of certainty or uncertainty of rivals' actions.   With perfect information, all of the players know the entire history of the game when it is their turn to move, whereas in games of imperfect information, at least some of the players have only partial knowledge of the history of the game.   In games of complete information, everyone knows the payoffs that each player receives when the game is over.   However, in games of incomplete information, players know their own payoffs but may not know the ultimate payoffs of some of the other players.

    Unit 5 Time Advisory   show close
    Unit 5 Learning Outcomes   show close
  • 5.1 Concepts in Game Theory  
  • 5.1.1 Introduction to Game Theory  
  • 5.1.2 Static Games and Nash Equilibrium  
    • Reading: Static Games and Nash Equilibrium

      Link: Drexel University: Professor Roger McCain's Strategy and Conflict: An Introductory Sketch of Game Theory (HTML)
       
      Instructions: Please read these webpages for intuitive explanations of some of the famous games in game theory.  For this section, please begin with the document titled "What Is Game Theory?" by clicking on the hyperlink of this title in the left side table of contents.  Proceed by clicking “next” at the bottom of each webpage you read until you reach the document titled "College Applicants." ."  Please skip the next two pages ("Proportional Games: The Commuter Game" and "Keynesian equilibrium as a Nash Equilibrium") and resume reading from "Cooperative Games," all the way up to "The Core and Competition."  After reading the material, it would be helpful for you to copy the games on a piece of paper and then try and solve them yourself.  This reading covers subunits 5.1.2.1-5.1.2.5.
       
      Note on the Text: The pages in this website present a series of static games that you need to know at this level.  It progresses step-by-step through the games, explaining the problem of the game, how it is to be solved, and the related concepts associated with it. 
       
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 5.1.2.1 The Prisoners' Dilemma  

    Note: This subunit is covered by the reading assigned under Unit 5.1.2. 

  • 5.1.2.2 Zero-Sum Games  

    Note: This subunit is covered by the reading assigned under Unit 5.1.2. 

  • 5.1.2.3 Non-constant Sum Games  

    Note: This subunit is covered by the reading assigned under Unit 5.1.2. 

  • 5.1.2.4 Multiple Equilibria Games  

    Note: This subunit is covered by the reading assigned under Unit 5.1.2. 

  • 5.1.2.5 Cooperative and Noncooperative Games  

    Note: This subunit is covered by the reading assigned under Unit 5.1.2. 

  • 5.1.3 Dynamic Games and Nash Equilibrium  
  • 5.1.3.1 Extensive Forms  

    Note: This subunit is covered by the reading assigned under Unit 5.1.3

  • 5.1.3.2 Strategies vs. Actions and Nash Equilibria  

    Note: This subunit is covered by the reading assigned under Unit 5.1.3

  • 5.1.3.3 Subgame Perfect Nash Equilibrium  

    Note: This subunit is covered by the reading assigned under Unit 5.1.3

  • 5.1.3.4 Two-Stage Games  

    Note: This subunit is covered by the reading assigned under Unit 5.1.3

  • 5.2 Cournot Oligopoly (Homogenous Products)  
  • 5.3 Bertrand Duopoly  

    Note: This subunit is covered by the reading assigned under Unit 5.2. 

  • 5.4 Stackelberg (sequential) Oligopoly  
  • 5.5 Collusive Behavior  
  • 5.5.1 Cooperative Collusion-Cartels  
  • 5.5.2 Non-Cooperative Collusions  
  • 5.5.3 Tacit Collusions  

    Note: This subunit is covered by the reading assigned under Unit 5.5.2. 

  • Unit 6: Business Practices: Strategies and Conduct  

    Competitive models tend to assume that consumers and competitors have perfect information about every firm’s single price.   In reality, however, markets deviate substantially from this scenario and indulge in all kinds of strategic behavior that makes such information ambiguous.   This behavior enables a firm, for example, to price-discriminate to its advantage; they may charge different prices for the same product either across firms (e.g. segmenting markets by geographic locationor to different customers of the same firm (e.g. airline tickets are cheaper for those who include a Saturday stay).  Other strategies may include indulging in non-price discrimination or engaging in research and development to have an edge on rivals as well as merging horizontally or integrating vertically.  We will study the impact that such behaviors have on other firms in the market.  

    Unit 6 Time Advisory   show close
    Unit 6 Learning Outcomes   show close
  • 6.1 Introduction to Strategic Behavior  
  • 6.1.1 Strategic and Tactical Choices  

    Note: This subunit is covered by the reading assigned under Unit 6.1. 

  • 6.1.2 The Stackelberg Model  

    Note: This subunit is covered by the reading assigned under Unit 6.1.

  • 6.1.3 Entry Deterrence  
  • 6.1.3.1 Entry Deterrence With Constant Returns to Scale  

    Note: This subunit is covered by the reading assigned under Unit 6.1.

  • 6.1.3.2 Entry Deterrence With Economies of Scale  

    Note: This subunit is covered by the reading assigned under Unit 6.1.

  • 6.1.4 Limit Pricing  

    Note: This subunit is covered by the reading assigned under Unit 6.1.

  • 6.2 Anticompetitive Strategic Behavior  
  • 6.2.1 Predatory Pricing  
  • 6.2.2 Entry Deterrence  
  • 6.2.2.1 Sunk expenditures and Investments  
  • 6.2.2.2 Entry Barriers  
  • 6.3 Principles of Strategic Behavior  
  • 6.4 Applications of Strategic Behavior  
  • 6.5 Non-Price Discrimination  
  • 6.5.1 Advertising  
  • 6.5.2 Research and Development  
  • 6.6 Horizontal Mergers  
  • 6.7 Vertical Integration and Vertical Restraints  
  • Unit 7: Antitrust Markets  

    In this section, we will study the boundaries of a market that is essential to antitrust enforcement.  The different definitions of boundaries have different implications for market power, market share, and firm conduct.  In order to ensure that the firms do not infringe upon each other's rights or have unfair practices, a market needs to be clearly defined.  Antitrust laws and competition policies define conduct that create, enhance, or preserve market power.

                After studying the distinction between economic markets and antitrust markets, we will analyze the the kind of markets that require antitrust enforcement and then move on to the role of elasticity of demand  in the two markets.

    Unit 7 Time Advisory   show close
    Unit 7 Learning Outcomes   show close
  • 7.1 Economic Markets and Antitrust Markets  
  • 7.2 The Search for Market Power  
  • 7.3 Case Study  
  • Unit 8: The Role of Government  

    Regulation is required in situations where a firm has excessive market power.   From a firm’s point of view, market power translates as greater profits and greater firm value.   However, from the perspective of consumers and policymakers, market power implies reduced social welfare, as firms make consumers pay higher prices for their products and services.  A high price can also lead to allocative inefficiency and even productive inefficiency (i.e. when a firm with market power tries to limit the supply of its good in order to keep its price high).  While policymakers work to reduce these inefficiencies through regulation, there are situations where imperfect markets may be preferable to regulated outcomesConsider, for example, instances where the government itself can be a cause of market power.  A firm interested in establishing a monopolist situation might work to influence policymakers by "rent seeking," resulting in wasteful side effects.

    This section studies the regulation of large business firms and corporations through antitrust laws.  It also discusses the regulation of industries in which services are provided exclusively by privately owned firms, but regulated by public agencies.  These firms are often called "public utilities."   Lastly, this unit addresses the role that the government plays in pointing out the potential problems that arise due to regulation.

    Unit 8 Time Advisory   show close
    Unit 8 Learning Outcomes   show close
    • Reading: Kevin Hinde's The Economics of Competition: A Global Perspective

      Link: Kevin Hinde'sThe Economics of Competition: A Global Perspective (PDF)

      Instructions: Please follow the link to reach the home page of Professor Kevin Hinde's The Economics of Competition: A Global Perspective course.  Under lecture 1, click on "Cusack JL and Hahn R W (2003) The costs and benefits of regulation. Implications for developing nations, OECD, Paris," and read this essay on regulation.  Please note that this reading covers subunits 8.1-8.3.

      Note on the Text: Please note this reading is hosted by Kevin Hinde, who is a Senior Teaching Fellow in Strategy and Economics at Durham University.

      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 8.1 The Rationale for Regulation  
  • 8.2 Governmental Regulation  
    • Reading: KevinHinde.com: Kevin Hinde's The Economics of Competition: A Global Perspective

      Link: KevinHinde.com: Kevin Hinde'sThe Economics of Competition: A Global Perspective (PDF)

      Instructions: Please follow the link to reach the home page of Professor Kevin Hinde's The Economics of Competition: A Global Perspective course.  Under lecture 1, click on "Cusack JL and Hahn R W (2003) The costs and benefits of regulation. Implications for developing nations, OECD, Paris," and read this essay on regulation.  Please note that this reading covers subunits 8.1-8.3.

      Note on the Text: Please note this reading is hosted by Kevin Hinde, who is a Senior Teaching Fellow in Strategy and Economics at Durham University.
      Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

  • 8.2.1 Regulation of Competition  

    Note: This subunit is covered by the reading assigned under Unit 8.2. 

  • 8.2.2 Regulation of Industries  

    Note: This subunit is covered by the reading assigned under Unit 8.2. 

  • 8.2.3 Social Regulation  

                Note: This subunit is covered by the reading assigned under Unit 8.2. 

  • 8.3 Problems with Regulation  

    Note: This subunit is covered by the reading assigned under Unit 8.2. 

    Note: Designing institutions for the purpose of regulation is not a simple matter.  Traditional regulatory arrangements have by and large proved to be unsatisfactory, often creating a great deal of economic inefficiency and weakening firm incentives to innovate or control costs.  As technologies and institutions change with time, so too does the degree of regulation.  The current trend is to deregulate or rely less on the regulation of entire industries wherever possible.  New arrangements allow for partial regulation of industries, providing competitive forces with more room to operate.

  • Final Exam  

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