ECON 364
Industrial Organization
Assistant Professor Nicola
Lacetera
Email: nicola.lacetera@case.edu
Office Phone: 216-368-2197
Office PLB280
Office hours
Mondays, 2-4:30pm at Starbucks on E115
Course schedule
MW, 12:30-1.45pm
Room PLB 401
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
(prices, quantities) 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. Even markets that,
at a first glance, might seem perfectly competitive, such as fish markets or
the markets for medical residents, are only imperfectly competitive, and/or are
regulated and centralized. 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” by Lynne Pepall, Dan Richards, and George Norman (I will indicate
the book at PRN hereinafter). Either
the third or the fourth edition (3E and 4E hereinafter) is fine. 3E has been
around longer and you can find good deals in the used book market. 3E is very
similar to 4E in the content, but, at the end of most chapters, references and
description of empirical studies have been added. We will refer to some of
these studies throughout the course. 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 a guest lecture, given by Glenn Mercer,
a McKinsey consultant. The lecture will be on the evolution of the US
automobile industry and the entrepreneurial opportunities around the industry.
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 throughout 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 Monday October 27 uring class time.
Glenn Mercer guest lectures
Each student will write a
one-page summary on the lecture given by Glenn Mercer.
Industry studies
You are asked to form teams of
three 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:
Examples of industry studies
are posted on Blackboard
Competitive strategy game (CSG)
Over the semester, the same
team formed to undertake the industry study will play an internet-based
strategy game. This multi-period game replicates, in stylized form, the
operating of four markets, and such decisions as whether to enter a market,
what capacity to invest in, what price to charge, and what additional information
and communication to share with competitors, will be made by each team.
Additional details about the Game will be described in class and posted on
Blackboard. Deadlines to submit each period’s strategies will be reported in
the detailed program below.
Composition of the final grade
Attendance and participation: 12%
Homework: 15%
Midterm exam: 30%
Glenn Mercer summaries: 8%
Industry study: 20%
CSG: 15%
Course material
The
PRN textbook can be found at the CWRU bookstore and on Amazon (here).
Most 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. Finally, I have 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. Please inform me of any of these issues at
the beginning of the course. The Coordinator of Disability Services can be
contacted at 216-368-5230.
Detailed schedule
|
Date |
Topic |
Readings |
Assignments
handed/due |
|
Aug. 25 |
Introduction: The theory of
Business Strategy and its welfare implications |
PRN (E3, E4), Ch. 2 Graddy, K., 2006: “The Fulton Fish Market”, Journal of Economic Perspectives. [Blackboard] |
Problem set 1 distributed |
|
Aug. 27 |
Introduction: Market
definition. Market Power and its determinants |
PRN (E3, E4), Ch. 3-4 |
|
|
Sept. 1 |
No class – Labor Day |
||
|
Sept. 3 |
Monopoly pricing: group
pricing, market segmentation |
PRN (E3, E4), Ch. 5 (skip
5.4) “Merck, AIDS, and Africa”,
NYU Stern Case [Blackboard] |
Problem set 1 due in class
Problem set 2 distributed |
|
Sept. 8 |
Monopoly pricing:
non-linear and two-part pricing |
PRN (E3, E4), 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. 10 |
Monopoly pricing: asymmetric
information, screening, quantity discounts, menu pricing |
PRN (E3, E4), Ch5: 5.4. Ch.
6: 6.2, 6.3 F.T.C.
v. MORTON SALT CO [Blackboard] |
|
|
Sept. 15 |
Introduction to CSG and
industry studies. Team formation |
|
|
|
Sept. 17 |
Monopoly choice of product
quality and variety |
PRN (E3, E4), Ch. 7: 7.1-4 “Starbucks
chairman warns of "the commoditization of the Starbucks experience” (link)
|
Problem set 2 due in class Problem set 3 distributed |
|
Sept. 22 |
Bundling and tie-ins |
PRN (E3, E4), Ch. 8: Intro,
8.1 |
|
|
Sept. 24 |
Strategic interactions:
static games and Nash Equilibrium |
PRN (E3, E4), Ch. 9: 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 |
|
Sept. 29 |
Strategic interactions:
dynamic games. Commitment and credibility. Repeated games and cooperation |
PRN (E3, E4), 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. 1 |
Oligopolistic competition:
the Bertrand Paradox and how to escape it. |
PRN (E3, E4), Ch. 10:
Intro, 10.1-10.2 “Britannica and Encarta”,
NYU Stern case [Blackboard] |
CSG Round 1 submission due
by 8pm |
|
Oct. 6 |
Oligopolistic competition:
the Cournot Model. Product vs. price competition, strategic complements and
substitutes |
PRN (E3, E4), Ch. 9:
9.4-9.6. Ch. 10: 10.4. |
CSG Round 2 submission due
by 8pm |
|
Oct. 8 |
Oligopolistic competition:
price competition with differentiated products. Non price competition through
“positioning”. Market creation and market stealing |
PRN (E3, E4), Ch 10: 10.3. Hays, C., 2000: “Tea by
Two”, The New York Times [Blackboard] |
Problem set 4 due in class
Problem set 5 distributed CSG Round 3 submission due by 8pm |
|
Oct. 13 |
Guest
speaker: Glenn Mercer, McKinsey: “The evolution of the automobile industry” 6-8pm,
Room TBA (Note the change of time!) |
||
|
Oct. 15 |
Dynamic competition: the
Stackelberg model, the power of commitment, and credibility |
PRN (E3, E4), Ch 11: Intro,
11.1-11.2 |
CSG Round 4 submission due by 8pm |
|
Oct. 20 |
No class – Fall Break |
||
|
Oct. 22 |
Dynamic competition and
entry deterrence: Limit pricing, excess capacity, product proliferation |
PRN, Ch. 12 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 CSG Round 5 submission due
by 8pm |
|
Oct. 27 |
Midterm exam |
||
|
Oct. 29 |
Non price competition:
R&D and IP strategies. Patent policy and innovation prizes |
PRN, Ch. 22-23 (E3, E4) Articles from The Economist (all on Blackboard) “A Gathering Storm”
(2007); “Patently Obvious” (2007); “The Lesson of Blackberry” (2005) |
Summaries of Glenn Mercer’s
talk due Problem set 6 distributed CSG Round 6 submission due
by 8pm |
|
Nov. 3 |
Mergers and acquisitions.
Vertical mergers and firm boundaries. CSG Interim Report |
PRN, Ch. 17.1,2,3, 5 (E3,
E4) Arthur Zaczkiewicz and
Vicki M. Young “Merger Mania Continues” “Arcelor Mittal Acquires Mexican Steel Producer” [Blackboard]
“ArcelorMittal takes 49
per cent in Brazilian miner” [Blackboard] |
CSG Round 7 submission due
by 8pm |
|
Nov. 5 |
Class canceled |
CSG Round 8 submission due
by 8pm |
|
|
Nov. 10 |
Mergers and acquisitions.
Horizontal mergers, diversification, and conglomerates. Alliances and
networks. |
PRN (E3, E4), Ch. 16, 17.4 The Economist,
2007: “Meandering Giants” [Blackboard] “Scale and Scope at
Citigroup”, NYU Stern case [Blackboard] The
Economist, “Flying in formation” [Blackboard] Benjamin Gomes-Casseres,
2006: “How AlliancesReshape Competition”, Handbook of Strategic Alliances [Blackboard] |
CSG Round 9 submission due
by 8pm |
|
Nov. 12 |
Collusion and cartels |
PRN (E3, E4), Ch. 14 |
CSG Round 10 submission due
by 8pm |
|
Nov. 17 |
Collusion and cartels |
PRN (E3, E4), Ch. 15 Salpukas, A., 1999: “An Oil Outsider Revives a Cartel” The New York Times [Blackboard] The Economist,
2007: “Silent Orchestration” [Blackboard] Solman, P., 2000: “Coffee deal brings price volatility” [Blackboard] |
CSG Round 11 submission due by 8pm |
|
Nov. 19 |
Competition Policy and
Antitrust |
PRN (E3, E4), 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] |
CSG Round 12 submission due
by 8pm |
|
Nov. 24 |
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 CSG Round 13 submission due
by 8pm |
|
Nov. 26 |
NO CLASS |
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|
Dec. 1 |
Wrap up |
||
|
Dec. 3 |
CSG Discussion (Team
Presentations) |
||
|
Dec. 5 |
Team industry studies due by
midnight (upload on Blackboard) |
||