Industrial Organization

, by Pepall, Lynne; Richards, Daniel J.; Norman, George

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ISBN: 9780538859486 | 0538859482
Cover: Hardcover
Copyright: 8/1/1998

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This textbook represents a distinct entry in the Industrial Organization market, bringing modern I/O analysis to the undergraduate level. This book is primarily intended for junior/senior level undergraduate courses taught out of economics departments at 4-year schools, but could also be used in a Managerial or Applied Economics class in an MBA program. The authors combine formal analysis with many practical applications. Consistent with modern analysis, the authors focus explicitly on the nature of strategic interaction and make extensive use of game theoretic tools. At the same time, they never lose sight of the policy motivation behind much IO analysis. The presentation does not assume familiarity with calculus, however, it relies heavily on the ability to work through algebraic equations.

CHAPTER 1 INTRODUCTION

(59)

1.1 In with the Old; In with the New

(2)

1.2 Antitrust Policy: A Historical Perspective

(10)

1.2.1 From Early Trust-Busting to the Rule of Reason

(3)

1.2.2 The "New" Sherman Act and Beyond

(6)

1.3 Competition versus Monopoly: The Poles of Market Performance

(16)

1.3.1 Perfect Competition

(5)

1.3.2 Monopoly

(3)

1.3.3 Profit Today versus Profit Tomorrow: Firm Decision Making over Time

(6)

1.4 Efficiency, Surplus, and Size Relative to the Market

(8)

1.4.1 The Monopolist and Her Surplus

(2)

1.4.2 The Nonsurplus Approach to Economic Efficiency

(3)

1.5 Competition, Monopoly, and Somewhere in Between: The Structure-Conduct-Performance Paradigm and the New IO

(8)

1.5.1 Practice Begets Theory: The Structure-Conduct-Performance Paradigm

(5)

1.5.2 The Theory behind Recent Practice: The Emergence of the New IO

(3)

1.6 Plan of the Book

(2)

Summary

(2)

Problems

(1)

References

(2)

Appendix: Excerpts from Antitrust Statutes

(5)

CHAPTER 2 PRODUCTION TECHNOLOGY AND MARKET STRUCTURE

(52)

2.1 Market Structure and Concentration

(9)

2.1.1 Measuring Market Structure

(3)

2.1.2 Measurement Problems: What Is a Market?

(4)

2.1.3 Upstream and Downstream Firms, Vertical Relationships, and Industry Classification

(2)

2.2 Production Technology and Costs

(15)

2.2.1 The Neoclassical or Technological View of the Firm

(2)

2.2.2 The Single-Product Firm

(6)

2.2.3 Sources of Scale Economies

(2)

2.2.4 Scale Economies--Fixed Costs and Sunk Costs

(5)

2.3 Multiproduct Technology: Economies of Scale and Scope

(17)

2.3.1 Flexible Manufacturing: Scope Economies and Product Differentiation

(5)

2.3.2 Empirical Evidence on Multiproduct Cost Functions

101

(1)

2.4 Noncost Determinants of Industry Structure

102

(2)

2.4.1 The Size of the Market

102

(1)

2.4.2 The Role of Government Policy

103

(1)

Summary

104

(1)

Problems

105

(2)

References

107

(3)

Appendix: Conversion from the Standard Industrial Classification (SIC) Codes to the North American Industry Classification System (NAICS)

110

(2)

CHAPTER 3 BASIC MONOPOLY PRICING AND PRODUCT STRATEGIES

112

(51)

3.1 The Single-Product Monopolist

113

(6)

3.1.1 Miss Daisy and Her Antique Cars

113

(5)

3.1.2 Monopoly and Consumer Surplus

118

(1)

3.2 Strategies and Degrees of Price Discrimination

119

(24)

3.2.1 First-Degree Price Discrimination

122

(7)

3.2.2 Second-Degree Price Discrimination

129

(6)

3.2.3 Third-Degree Price Discrimination

135

(8)

3.3 Price Discrimination and Social Welfare

143

(1)

3.4 Public Policy and Price Discrimination

144

(3)

3.5 Monopoly, Product Quality, and Social Welfare

147

(8)

3.6 The Multiplant Monopolist

155

(3)

Summary

158

(1)

Problems

159

(3)

References

162

(1)

CHAPTER 4 PRODUCT AND PRICING STRATEGIES FOR THE MULTIPRODUCT MONOPOLIST

163

(60)

4.1 Product Variety and Price Discrimination

164

(5)

4.2 A Spatial Approach to Product Variety

169

(21)

4.2.1 Monopoly Pricing in the Spatial Model

174

(7)

4.2.2 Monopoly and the Choice of Variety in the Spatial Model

181

(9)

4.3 Product Tie-ins and Price Discrimination

190

(20)

4.3.1 Commodity Bundling and Tie-in Sales

191

(1)

4.3.2 Commodity Bundling as a Mechanism for Price Discrimination

191

(10)

4.3.3 Required Tie-in Sales

201

(1)

4.3.4 Bundling, Tie-ins, and the Extension of Monopoly Power

202

(3)

4.3.5 Complementary Goods, Network Externalities, and Monopoly

205

(5)

4.4 Antitrust and Tie-in Sales

210

(4)

Summary

214

(1)

Problems

215

(2)

References

217

(1)

Appendix A: The Monopolist's Choice of Price When Her Shops Have Different Costs

218

(3)

Appendix B: Formal Proof of the Inefficiency Induced by the Marketing of Complementary Goods by Separate Monopolists

221

(2)

CHAPTER 5 THEORIES OF BUSINESS STRATEGY IN OLIGOPOLY MARKETS: SINGLE-MARKET PERIOD MODELS

223

(56)

5.1 Strategic Interaction: Introduction to Game Theory

225

(10)

5.1.1 Dominated and Dominant Strategies

230

(2)

5.1.2 The Nash Equilibrium as a Solution Concept

232

(3)

5.1.3 Mathematical Presentation of the Nash Equilibrium

235

(1)

5.2 Single-Period Models of Oligopoly

235

(1)

5.3 The Cournot Duopoly Model

236

(18)

5.3.1 Variations on the Cournot Theme: Many Firms and Different Costs

245

(6)

5.3.2 Concentration and Profitability: Implications of the Cournot Model

251

(3)

5.4 Price Competition: The Bertrand Duopoly Model

254

(13)

5.4.1 Bertrand Reconsidered

260

(2)

5.4.2 Price Competition and Product Differentiation: Bertrand in a Spatial Setting

262

(5)

5.5 A Brief Digression on Strategic Complements and Substitutes

267

(2)

5.6 A Sequential Model of Oligopoly: The Stackelberg Model

269

(4)

Summary

273

(1)

Problems

274

(3)

References

277

(2)

CHAPTER 6 MONOPOLY POWER AND PREDATORY CONDUCT

279

(64)

6.1 Monopoly Power and Market Entry

281

(2)

6.2 The Dominant Firm and Competitive Fringe Model

283

(7)

6.2.1 The Possibility of Predation in the Dominant Firm and Competitive Fringe Model

287

(2)

6.2.2 Criticism of the Dominant Firm and Competitive Fringe Model

289

(1)

6.3 Predatory Conduct, Predatory Pricing, and Mergers

290

(6)

6.4 Credibility of Threats and Nash Equilibria for Dynamic Games

296

(11)

6.4.1 The Chain-Store Paradox

300

(3)

6.4.2 Limit Pricing: An Alternative Analysis Based on Quantity Commitment

303

(4)

6.5 Capacity Expansion as a Credible Entry-Deterring Commitment

307

(20)

6.5.1 Preemption and the Persistence of Monopoly

323

(1)

6.5.2 Anecdotal Evidence on Predatory or Preemptive Capacity Expansion

324

(3)

6.6 Limit Pricing and Imperfect Information

327

(7)

6.7 Predatory Conduct and Public Policy

334

(3)

Summary

337

(2)

Problems

339

(1)

References

340

(3)

CHAPTER 7 COLLUSION AND CARTELS

343

(59)

7.1 Cartels

345

(2)

7.2 Do Firms Really Have an Incentive to Cooperate?

347

(4)

7.3 Production Quotas and Stability in a Single Market Period Cartel

351

(13)

7.4 Repeated Games

364

(19)

7.4.1 Modeling a Repeated Game

365

(4)

7.4.2 Repeated Games with a Finite Horizon

369

(7)

7.4.3 Repeated Games with an Infinite Horizon

376

(7)

7.5 Where Is Collusion Most Likely to Occur?

383

(8)

7.6 Detecting Collusion among Firms

391

(6)

Summary

397

(1)

Problems

398

(2)

References

400

(2)

CHAPTER 8 MERGERS

402

(66)

8.1 Horizontal Mergers

405

(17)

8.1.1 The Merger Paradox

405

(5)

8.1.2 The Merged Firm as a Stackelberg Leader--A Second Paradox

410

(3)

8.1.3 A Model with Several Industry Leaders and Several Followers--Paradoxes Lost

413

(9)

8.2 Horizontal Mergers in the Context of Product Differentiation

422

(11)

8.2.1 No Price Discrimination

424

(7)

8.2.2 Price Discrimination

431

(2)

8.3 Vertical Mergers

433

(14)

8.3.1 Mergers of Firms That Produce Complementary Goods

433

(1)

8.3.2 Vertical Mergers: A Common Way to Resolve a Common Type of Complementarity

434

(6)

8.3.3 Vertical Merger to Facilitate Price Discrimination

440

(1)

8.3.4 Vertical Merger to Facilitate Market Foreclosure

441

(6)

8.4 Conglomerate Mergers

447

(6)

8.4.1 Economies of Scope

447

(2)

8.4.2 Financial Diversification

449

(1)

8.4.3 Transactions Costs

449

(1)

8.4.4 Managerial Motives

450

(3)

8.5 A Brief Digression on Mergers and the Theory of the Firm

453

(2)

8.6 Mergers and Public Policy

455

(5)

Summary

460

(1)

Problems

461

(3)

References

464

(2)

Appendix: Equilibrium Prices in the Spatial Model

466

(2)

CHAPTER 9 VERTICAL RELATIONS AND RESTRAINTS

468

(57)

9.1 Vertical Restraints as a Response to Double Marginalization

472

(10)

9.1.1 Double Marginalization, Royalties, and Moral Hazard

474

(4)

9.1.2 Two-Part Tariffs as a Solution to the Double-Marginalization Problem

478

(1)

9.1.3 Resale Price Maintenance and Double Marginalization

479

(3)

9.2 Vertical Agreements to Ensure Provision of Retail Services

482

(14)

9.2.1 Retail Services of the Integrated Firm

484

(5)

9.2.2 The Case of a Monopoly Retailer and a Monopoly Manufacturer

489

(3)

9.2.3 The Case of Competitive Retailing

492

(4)

9.3 Resale Price Maintenance: Fixing Prices or Market Failures

496

(12)

9.3.1 Resale Price Maintenance, Customer Services, and Free Riding

497

(2)

9.3.2 Resale Price Maintenance as a Response to Variable Demand

499

(7)

9.3.3 RPM Agreements in Historical Perspective

506

(2)

9.4 Exclusive Territories

508

(2)

9.5 Competition Upstream and Exclusive Dealing

510

(3)

9.6 Franchising and Divisionalization

513

(5)

9.7 A Note on Vertical Relations and the Theory of the Firm

518

(2)

Summary

520

(1)

Problems

521

(3)

References

524

(1)

CHAPTER 10 ADVERTISING

525

(59)

10.1 Consumer Fraud and Truth in Advertising

529

(3)

10.2 Advertising: Some Basic Analysis

532

(4)

10.2.1 The Extent of Advertising in the United States

532

(1)

10.2.2 Early Views on the Effect of Advertising Expenditures

533

(3)

10.3 Advertising and Signaling

536

(6)

10.4 A Complementary View of Advertising and Monopoly Power

542

(19)

10.4.1 Advertising and Crowd Appeal

545

(3)

10.4.2 Advertising, Brand Recognition, and Information

548

(2)

10.4.3 The Monopolist's Profit-Maximizing Choice of Advertising

550

(7)

10.4.4 Monopoly Power: Too Much or Too Little Advertising

557

(1)

10.4.5 Competition and the Extent of Advertising

558

(3)

10.5 Advertising and Brand Competition

561

(12)

10.6 Cooperative Advertising and the Robinson-Patman Act

573

(5)

Summary

578

(2)

Problems

580

(1)

References

581

(3)

CHAPTER 11 RESEARCH AND DEVELOPMENT

584

(63)

11.1 A Taxonomy of Innovations

589

(2)

11.2 Market Structure and the Incentive to Innovate

591

(9)

11.2.1 R&D as Direct Interfirm Competition

595

(3)

11.2.2 Some Evidence

598

(2)

11.3 Patents and Patent Policy

600

(7)

11.3.1 The Optimal Patent Length

601

(5)

11.3.2 The Optimal Breadth of Patents

606

(1)

11.4 Patents, Patent Races, and Innovation as an Influence on Structure

607

(13)

11.4.1 Patent Races

608

(6)

11.4.2 Patents and Innovative Activity as an Influence on Market Structure

614

(3)

11.4.3 Monopoly Power and "Sleeping Patents"

617

(3)

11.5 Patent Licensing

620

(7)

11.5.1 The Incentive for an Oligopolist to License a Nondrastic Innovation

621

(2)

11.5.2 Licensing, Drastic Innovations, and Monopoly Power

623

(1)

11.5.3 Patent Licensing, Social Welfare, and Public Policy

624

(3)

11.6 Cooperation on R&D Efforts between Firms: Technology Cartels

627

(14)

11.6.1 Noncooperative R&D: Profit, Prices, and Social Welfare

629

(6)

11.6.2 Technology Cartels and Cooperative Joint Ventures

635

(6)

Summary

641

(1)

Problems

642

(2)

References

644

(3)

CHAPTER 12 STRATEGIC COMMITMENTS: BUSINESS TACTICS, TRADE POLICY, AND NETWORK EXTERNALITIES

647

(54)

12.1 Commitment as a Strategic Device

648

(4)

12.2 Strategic Complements and Strategic Substitutes: Fat Cats, Puppy Dogs, Top Dogs, and the Lean and Hungry Look

652

(15)

12.2.1 Fat Cats and Puppy Dogs: Entry Accommodation and Strategic Complements

655

(3)

12.2.2 Top Dogs and the Lean and Hungry Look: Entry Accommodation and Strategic Substitutes

658

(3)

12.2.3 Entry Deterrence: Top Dogs and Lean and Hungry Firms Once Again

661

(4)

12.2.4 A Summary of the Taxonomy

665

(2)

12.3 Strategic Commitment in International Markets

667

(16)

12.3.1 Strategic Subsidies to Domestic Export Firms

669

(5)

12.3.2 Strategic Subsidies to Research and Development

674

(4)

12.3.3 Strategic Tariffs and Nontariff Trade Barriers

678

(2)

12.3.4 International Trade Organizations as a Commitment Mechanism

680

(3)

12.4 Network Externalities, Standardization, and Product Compatibility

683

(13)

12.4.1 Monopoly Provision of a Network Service

684

(3)

12.4.2 Will Network Externalities Lead to Standardization?

687

(9)

Summary

696

(1)

Problems

697

(2)

References

699

(2)

ANSWERS TO PRACTICE PROBLEMS

701

(8)

GLOSSARY

709

(4)

INDEX

713

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Industrial Organization

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