ECON
364 Industrial Organization
Assistant Professor Nicola Lacetera
Email:
nico.lacetera@case.edu
Office Phone:
216-368-2197
Office PLB280
Office
hours
Thursdays,
2-4:30pm at Arabica Cafe
Course
schedule
MW,
12:30-1.45pm
Room
PLB 201
Introduction
Most of the
industries and companies that spring to mind when we think of business do not
fit into the model of perfect competition used in introductory courses in
microeconomics, where companies’ profits are driven to zero. Many industries,
such as automobiles, oil production, computers’ operating systems,
pharmaceuticals, and soft drinks are not characterized by a large number of
small firms that take market variables (e.g. prices) as given and do not affect
them. McDonalds, Microsoft, Pepsi, the oil companies and the like do make
profits, control prices, decide to advertise, and so
on. This course studies these sorts of real companies and real markets.
Students will learn about the rationale behind such business strategies as
pricing and price discrimination, price wars, product differentiation,
advertising, R&D strategies, bundling and tie-ins, building entry barriers,
mergers and acquisitions, collusion and cartels, and the dynamics of network
industries (e.g. information and communication technologies).
The course will
take two complementary approaches to the studies of industries. First, we will
consider the point of view of companies, and ask how different business
strategies can affect competitive success. Second, we will consider the
perspective of consumers and policy makers: we will ask whether different firm
strategies enhance or reduce social welfare, and will explore different policy
options to increase welfare. These options include antitrust policies and
patent systems.
The textbook
for this course is “Industrial
Organization: contemporary theory and practice” (3rd edition),
by Lynne Pepall, Dan Richards, and George Norman (I will indicate the book as
PRN hereinafter). In addition to the textbook, students will also be assigned
short cases (mostly newspaper articles) for each class. Students will also be
required to perform some bibliographic research (in teams) for their final
project.
The typical
class is made up of an initial discussion of the assigned newspaper article(s)
or case(s), followed by the introduction of some economic tools for the
analysis of a given business strategy and its consequences on companies’
profits, industry structure, and social welfare.
Over the term,
the students will form teams and play the Competitive Strategy Game. Details
are below.
There will also
be two guest lectures, given by Glenn Mercer, a McKinsey consultant. The first
lecture will be on the evolution of the US automobile industry. The second
lecture will be on the Automobile X Prize competition.
Audience
This course
should be valuable for anyone interested in:
1) Managerial
positions in companies (especially in strategy and marketing), business
consulting, or investment banking (especially the mergers and acquisitions
side).
2) Careers at
the intersection of law and economics, including law school and careers in
regulation or consumer protection.
3) Economic
research, including graduate school or a career in policymaking.
Prerequisites
Knowledge of microeconomic principles at the level of ECON 102 and
of basic calculus and statistics (at the level of STAT 207) is required.
Requirements
and grading
The final grade will be based on the performance on a series of
requirements.
Attendance and
participation
I expect you to come to class (and to tell me in advance if you
have to miss one), and to actively participate in the discussion. The initial
part each class will be spent discussing the required cases and articles.
Please come prepared by reading the assigned material in advance.
Problem sets
There will be six problem sets over the course, to be handed in at
dates specified in the detailed schedule below. Doing the problems sets is of
key importance in order to do well in the midterm exam (see below). In
addition, the problem sets are designed in order to clarify the concepts
learned in class, apply them to real cases, and also to introduce topics that
we do not have time to treat in class.
While this is an individual task, you should feel free to interact
with your fellow students in try to answer the questions in the problem sets.
Midterm exam
A midterm exam will be given on Wednesday, October 31 during class
time.
Glenn Mercer
guest lectures
Each student will write a one-page summary of each of the two
lectures given by Glenn Mercer.
Industry
studies
You are asked to form teams and, as a final project for the class,
elaborate a ten-page (double spaced, 12pt font size) study of an industry of your
choice. While there is no unique format for the study, I would like to learn
about the following issues:
Competitive
strategy game (CSG)
Over the semester, the same teams formed to undertake the industry
study will play an internet-based strategy game in a simulated market
environment, where the teams compete in a number of market markets, choosing
which market(s) to enter, how much production capacity to build, what prices to
charge, and so on. Detail about the game will be given in class.
Composition of
the final grade
Attendance and participation: 10%
Homework: 15%
Midterm exam: 30%
Glenn Mercer summaries: 10%
Industry study: 20%
CSG: 15%
Course
material
The PRN textbook can be found at the
CWRU bookstore as well as on Amazon (here). Some of the
cases and articles are freely available online through major databases the
university subscribes to. I added links to these readings in the detailed
syllabus below. Some readings, and especially the cases, are not freely
available. They will be available online in a course pack, through www.xanedu.com.
Finally, I put some readings on Blackboard.
Academic
Integrity
University
policy on plagiarism and academic integrity will be rigorously enforced. The University
does not tolerate cheating or plagiarism in any form. Cheating or plagiarism
will result in a failing grade. Ignorance is not considered an excuse. If you
are not sure whether or not something you plan to submit would be considered
either cheating or plagiarism, please do not hesitate to ask me, or your other
faculty.
Students
with Disabilities
I will be happy to meet with students with disabilities and who
may need individual arrangements. The Coordinator of Disability Services can be
contacted at 216-368-5230.
Detailed
schedule
|
Date |
Topic |
Readings |
Assignments handed/due |
|
Aug. 27 |
Introduction: The theory of Business Strategy and its welfare
implications |
PRN, Ch. 2 Cola Wars Continue: Coke and Pepsi in 2006, HBS case (course
pack) |
Problem set 1 distributed |
|
Aug. 29 |
Introduction: Market definition. Market Power and its
determinants |
PRN, Ch. 3-4 |
|
|
Sept. 3 |
No class –
Labor Day |
||
|
Sept. 5 |
Monopoly pricing: 3rd degree price discrimination,
market segmentation |
PRN, Ch. 5 (skip 5.4) “Merck, AIDS, and Africa”, NYU Stern Case [Blackboard] |
Problem set 1 due in class Problem set 2 distributed |
|
Sept. 10 |
Monopoly pricing: 1st
degree price discrimination and two part pricing |
PRN, Ch. 6: Intro, 6.1. Hamilton, D.,
2001: “The Price Isn't Right: Internet pricing has turned out to be a lot
trickier than retailers expected”, The
Wall Street Journal [Blackboard] Yinger, G., 1998: “Evidence on Discrimination in Consumer
Markets”, Journal of Economic
Perspectives, 12, 2, 23-40 [Jstor] |
|
|
Sept. 12 |
Monopoly pricing: 2nd
degree price discrimination, screening, quantity discounts |
PRN, Ch5: 5.4. Ch. 6: 6.2, 6.3 |
|
|
Sept. 17 |
Introduction to CSG and industry studies. Team formation |
Problem set 2 due in class |
|
|
Sept. 19 |
Monopoly choice of product quality and variety |
PRN, Ch. 7: 7.1 - 7.4 |
Problem set 3 distributed |
|
Sept. 24 |
Bundling and tie-ins |
PRN, Ch. 8: Intro, 8.1 “Cable customers' choices being
debated”, Yahoo News |
|
|
Sept. 26 |
Strategic interactions: static games and Nash Equilibrium |
PRN, Ch9: Intro, 9.1-9.3. Hartford, 2006: “Hezbollah and the Prisoner's Dilemma”, Slate [Blackboard] |
Problem set 3 due in class Problem set 4 distributed |
|
Oct. 1 |
Strategic interactions: dynamic games. Commitment and
credibility. Repeated games and cooperation |
PRN, Ch. 11: Intro, 11.3-11.4 Leyden, G., 2003: “Oracle chokes on PeopleSoft's poison pill”, The Register [Blackboard] Ferriere, R., 1998: “Help and you shall be helped”, Nature [Blackboard] |
|
|
Oct. 3 |
Oligopolistic competition: the Bertrand Paradox and how to
escape it. |
PRN, Ch. 10: Intro, 10.1-10.2 “Britannica and Encarta”, NYU Stern case [Blackboard] |
|
|
Oct. 8 |
Oligopolistic competition: the Cournot Model. Product vs. price
competition, strategic complements and substitutes |
PRN, Ch. 9: 9.4-9.6. Ch. 10: 10.4. |
Problem set 4 due in class Problem set 5 distributed |
|
Oct. 10 |
No Class |
||
|
Oct. 15 |
Oligopolistic competition: price competition with differentiated
products. Non price competition through “positioning”. Market creation and
market stealing |
PRN, Ch 10, 10.3. Hays, C., 2000: “Tea by Two”, The New York Times [Blackboard] |
|
|
Oct. 17 |
Dynamic competition: the Stackelberg model, the power of
commitment, and credibility |
PRN, Ch 11: Intro, 11.1-11.2 |
|
|
Oct. 22 |
No class –
Fall Break |
||
|
Oct. 24 |
Guest speaker: Glenn Mercer, McKinsey: “The
evolution of the automobile industry” 6-8pm, Room
TBA Note: No
class during regular time |
||
|
Oct. 29 |
Dynamic competition and entry deterrence: Limit pricing, excess
capacity, product proliferation |
PRN, Ch. 12 “Product Proliferation and Preemption”, HBS Case [course pack] Culpan, T., 2007: “Intel Tells Customers It Will Slash Chip
Prices 50%”, Bloomberg [Blackboard] Rao, A. et al., 2001: “How to Fight a Price War”, Harvard Business Review [Blackboard] |
Problem set 5 due in class |
|
Oct. 31 |
Midterm exam |
||
|
Nov. 5 |
Non price competition: advertising; contracts |
PRN, Ch. 20-21 “Heineken N.V.: Global Branding and Advertising”, HBS case
[course pack] Shishkin, P., 2000: “EU Body Makes Spanish Oil Firm Make
Contract More Competitive”, Wall Street Journal [Blackboard] |
Summaries of Glenn Mercer’s talk due Problem set 6 distributed |
|
Nov. 7 |
Non price competition: R&D and IP strategies. Patent policy
and innovation prizes |
PRN, Ch. 22-23 Articles from
The Economist (all on Blackboard) “A Gathering Storm” (2007); “Patently
Obvious” (2007); “The Lesson of Blackberry” (2005) |
|
|
Nov. 12 |
Collusion and cartels |
PRN, Ch. 14 The Economist, 2007:
“Silent Orchestration” [Blackboard] |
|
|
Nov. 14 |
Collusion and cartels |
PRN, Ch. 15 Salpukas, A., 1999: “An Oil Outsider Revives a Cartel” The New York Times [Blackboard] Solman, P., 2000:
“Coffee deal brings price volatility” [Blackboard] |
|
|
Nov. 19 |
Mergers and acquisitions. Diversification |
PRN, Ch. 16 The Economist, 2007:
“Meandering Giants” [Blackboard] “Scale and Scope at Citigroup”, NYU Stern case [Blackboard] |
|
|
Nov. 21 |
Competition Policy and Antitrust |
PRN, Ch. 1: 1.3, Appendix The Economist, 2002: “Setting
the Trap” [Blackboard] US vs. AMR Corp [Blackboard] “EU
charges Intel with monopoly abuse”, Business Week, July 27 2007 [Blackboard].
The Economist,
2007: “Flying in formation” [Blackboard] Dennis W. Carlton, 2007: “Does Antitrust Need to be
Modernized?”, Journal of
Economic Perspectives |
|
|
Nov. 26 |
Network externalities and the Microsoft antitrust case |
PRN, Ch. 8: 8.4. Ch. 24 Gilbert, R. and Katz, M., 2001: “An Economist’s Guide to US vs. Microsoft” [Blackboard] |
Problem set 6 due in class |
|
Nov. 28 |
Wrap up |
||
|
Dec. 3 |
Guest speaker: Glenn Mercer, McKinsey: “The
automotive X Prize” |
||
|
Dec. 5 |
CSG discussion (team presentations) |
Summaries of Glenn Mercer’s talk due |
|
|
Dec. 7 |
Team industry studies due by midnight (upload on Blackboard) |
||