UNIVERSITY OF WYOMING
COLLEGE OF BUSINESS
DEPARTMENT OF ECONOMICS AND FINANCE
Economics 5820
Advanced Industrial Organization and Public Policy
M, W 9:00 - 10:15
RH #135
Spring Semester 2005
Instructor:
Office:
Telephone:
Office Hours:
E-Mail:
Fax:
Owen R. Phillips
124 Ross Hall
Office: 766-2195, Department: 766-2178
1:00-2:30 p.m., Monday and Wednesday, and by appointment
owenphil@uwyo.edu
766-5090
Course Description:
This course is an application of market and price theory to concentration, size, competition; antitrust;
close-knit and loose-knit combination business practices; price leadership and discrimination; delivered
pricing; fair trade; unfair competition and public policy.
Prerequisites:
Econ 5010, 5020 or equivalent.
Course Objective:
This course studies the organization of markets with particular emphasis on the firm. We study how
firms behave when competition is imperfect. This field is broadly referred to as industrial organization.
Public policies have developed to control some business behavior. We also study this policy for
unregulated industries; this area of study is generally referred to as antitrust economics. Both fields
have a large literature. In one semester we will have time to only touch on selected topics, become
familiar with selected parts of the literature, and develop the basic economic theory.
Required Texts:
Jean Tirole, The Theory of Industrial Organization, MIT Press, 1988.
Joel Watson, Strategy: An Introduction to Game Theory, Norton, 2002.
Recommended Reading:
F.M. Scherer and David Ross, Industrial Market Structure and Economic Performance, Houghton
Mifflin, 1990.
Oz Shy, Industrial Organization, MIT Press, 1995.
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Stephen Martin, Advanced Industrial Organization, Second Edition, Blackwell, 2002.
The reading list provided below is designed to expose you to some of the literature. It is not all
required reading. Those references marked with a * are highly recommended. Regular assignments are
also made from the required text. It is important that you keep up with all the assigned readings. The
text in particular does an excellent job of exposing you to the basics. An optional text that provides an
extensive survey of the literature is F.M Scherer and David Ross, Industrial Market Structure and
Economics Performance, Houghton Mifflin, 1990.
Grading and Course Requirements:
There will be one midterm exam that will count 50 points toward your grade. Homework assignments
will be given on a regular basis. These will collectively count 50 points toward your grade. A final
exam will be given at the end of the semester; it will count toward 100 points of your grade. A paper
on a topic approved by the instructor may be written for extra points and can be substituted for the final
exam. If you choose to write a paper it is due no later than the day of the final exam. You also may
choose to take the final exam and supplement your grade with the term paper. For students not
comfortable with the exams this is a wonderful opportunity that may lead to an M.S. or Ph.D. paper.
Attendance:
Attendance in all classes is expected. In only rare cases are late papers accepted and make-up exams
allowed.
Academic Dishonesty:
Also know as “cheating”, academic dishonesty will not be tolerated in this class. Cases of academic
dishonesty will be prosecuted in accordance with UNIREG 802 Rev. 2. Cheating in this course can
result in an “F” in the course. In this course, academic dishonesty includes (but is not limited to)
unapproved assistance on examinations, copying the homework of others, plagiarism or other use of
published materials without complete citations, or fabrication or referenced information.
Group work Guidelines:
Students are encouraged to work in study groups on homework assignments and in preparing for
exams.
Disclaimer:
Changes in exam dates scheduled lecture topics and homework assignments may occur. The
homework schedule is approximate. Changes will be announced in class.
Course Schedule and Reading List
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I.
An Introduction to Market Structures: Defining the Market and Concentration.
Bain, Joseph, Industrial Organization, Second Edition, Wiley, 1968.
Blair, Roger, and Kaserman, David, Antitrust Economics, Irwin, 1985.
Carlton, Dennis and Perloff, Jeffrey, Modern Industrial Organizations, Third Edition, AddisonWesley, 1999.
Martin, Stephen, Advanced Industrial Economics, Second Edition, Blackwell, 2002.
*Scherer, F.M. and Ross, David, Industrial Market Structure and Economic Performance,
Third Edition, Houghton Mifflin, 1990 (Chapters 1 and 2).
Shy, Oz, Industrial Organization, MIT Press, 1995.
II.
Concepts and Measures of Efficiency.
*Baumol, W. and Bradford, D., "Optimal Departures from Marginal Cost Pricing,"
American Economic Review, Vol. 60(3), June 1970, pp. 265-283.
Comanor, W. and Leibenstein, H., "Allocative Efficiency, X-Efficiency, and the
Measurement of Welfare Losses," Economica, Vol. 36(143), August 1969, pp.
304-309.
*Dansby, R. and Willig, R., "Industry Performance and Gradient Indexes," American
Economic Review, Vol. 69(3), June 1979, pp. 249-260.
Harberger, A., "Monopoly and Resource Allocation," American Economic Review,
Vol. 44(2), May 1954, pp. 77-92.
Hicks, J., A Revision of Demand Theory, Oxford Press, 1956.
Oz Shy, Industrial Organization, (Chapters 3 and 4).
Leibenstein, H., "Allocative Efficiency vs. X-Efficiency," American Economic Review,
Vol. 56(3), June 1966, pp. 392-415.
Weizsacker, C., “A Welfare Analysis of Barriers to Entry,” Bell Journal of Economics
Vol 11(2), Autumn 1980, pp.399-420.
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Willig, R., "Consumer's Surplus Without Apology," American Economic Review,
Vol. 66(4), Sept. 1976, pp. 589-597.
III.
Monopoly.
*Baumol, W., "Contestable Markets: An Uprising in the Theory of Industry Structure,"
American Economic Review, Vol. 21(1), March 1982, pp. 1-15.
Baumol, W., "On the Proper Cost Tests for Natural Monopoly in a Multiproduct
Industry," American Economic Review, Vol. 67(5), December 1977, pp. 809-22.
*Baumol, W., "Quasi-Permanence of Price Reductions: A Policy for Prevention of
Predatory Pricing," Yale Law Journal, Vol. 89(1), November 1979, pp. 1-26.
Baumol, W., Bailey, E., and Willig, R., "Weak Invisible Hand Theorems on the
Sustainability of Multiproduct Natural Monopoly," American Economic Review,
Vol. 67(3), June 1977, pp. 350-65.
Oz Shy, Industrial Organization, Chapter 5.
Panzar, J. and Willig, R., "Free Entry and the Sustainability of Natural Monopoly," Bell
Journal of Economics, Vol. 8(1), Spring 1977, pp. 1-22.
Shepherd, W., "Contestability v. Competition," American Economic Review, Vol. 74(4),
September 1984, pp. 572-87.
*Triole, The Theory of Industrial Organization, (Chapter 1, 62-94).
IV.
Oligopoly, Rivalry, and Game Theory.
Dixit, A. and Nalebuff, B., Thinking Strategically, Norton, 1991.
Friedman, J., Oligopoly and the Theory of Games, North-Holland, 1977.
Fudenberg, D. and Tirole, J., "Noncooperative Game Theory for Industrial Organization: An
Introduction and Overview," in R. Schmalensee and R. Willig, eds., Handbook of Industrial
Organization, Vol. 1, Elsevier, 1989.
Gibbon, R., Game Theory for Applied Economists, Princeton University Press, 1992.
Green, E. and Porter, R., "Noncooperative Collusion Under Imperfect Information,"
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Econometrica, Vol. 52(1), January 1984, pp. 87-100.
Kreps, D., Game Theory and Economic Modelling, Oxford, 1990.
Martin, Stephen, Advanced Industrial Economics, (Chapters 2, 3, 4).
Schilling, T., The Strategy of Conflict, Harvard Press, 1960.
Shy, O., Industrial Organization, Chapters 2 and 6.
*Tirole, J., The Theory of Industrial Organization, Chapters 5-7, pp. 209-304.
*Watson, Joel, Strategy: An Introduction to Game Theory, Norton, 2002.
V.
Prices, Cost, and Entry Deterrence.
*Bernheim, B., "Strategic Entry Deterrence into an Industry," Rand Journal of
Economics, Vol. 15(1), Spring 1984, pp. 1-11.
Dunne, T., Roberts, M., and Samuelson, L., “Patterns of Firm Entry in U.S.
Manufacturing Industries,” Rand Journal of Economics, Vol. 19(4), Winter
1988, pp. 495-515.
Eaton, B.C. and Lipsey, R.G., “Exit Barriers Are Entry Barriers: the Durability of
Capital as a barrier to Entry,” Bell Journal of Economics, Vol. 11(2), Autumn 1980,
pp. 721-729.
*Dixit, A., "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal
of Economics, Vol. 10(1), Spring 1979, pp. 20-32.
Gaskins, D., "Dynamic Limit Pricing: Optimal Pricing Under Threat of Entry," Journal
of Economic Theory, Vol. 3(3), September 1971, pp. 306-321.
Martin, Stephen, Advanced Industrial Economics. (Chapter 8).
Milgrom, P. and Roberts, J., "Limit Pricing and Entry Under Incomplete Information,"
Econometrica, Vol. 50, March 1982, pp. 443-469.
Milgrom, P. and Roberts, J., "Predation, Reputation, and Entry Deterrence," Journal of
Economic Theory, Vol. 27, August 1982, pp. 280-312.
Modigliani, F., "New Developments on the Oligopoly Front," Journal of Political
Economy, Vol. 66(3), June 1958, pp. 215-232.
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Osborne, "On the Rationality of Limit Pricing," Journal of Industrial Economics,
Vol. 22, September 1973, pp. 71-80.
*Salop, S. and Scheffman, D., "Raising Rival's Cost," American Economic Review,
Vol. 73(2), May 1983, pp. 267-271.
Shepherd, W., "Entry as a Substitute for Regulation," American Economic Review,
Vol. 63(2), May 1973, pp. 98-105.
Shy, Oz. Industrial Organization, Chapter 8.
*Spence, A., "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of
Economics, Vol. 8(2), Autumn 1977, pp. 534-544.
Spence, A., "Investment Strategy and Growth in a New Market," Bell Journal of
Economics, Vol. 10(1), Spring 1979, pp. 1-19.
*Tirole, J., The Theory of Industrial Organization, Chapters 8-9, pp. 305-388.
VI.
Product Differentiation and Entry Deterrence.
Chamberlin, E., "The Product as an Economic Variable," Quarterly Journal of
Economics, Vol. 68(1), Feb. 1953, pp. 1-29.
Dixit, A. and Stiglitz, J., "Monopolistic Competition and Optimum Product Diversity,"
American Economic Review, Vol. 67(3), June 1977, pp. 297-308.
*Hotelling, H., "Stability in Competition," Economic Journal, Vol. 39, March 1929,
pp. 41-57.
Lancaster, K., "Socially Optimal Product Differentiation," American Economic Review,
Vol. 65(4), September 1975, pp. 567-585.
Leland, H., "Quality Choice and Competition," American Economic Review, Vol. 67(2),
March 1977, pp. 127-35.
Lovell, M., "Product Differentiation and Market Structure," Economic Inquiry,
Vol. 8(2), June 1970, pp. 120-143.
*Scherer, F., "The Welfare Economics of Product Variety: An Application to the
Ready-to-Eat Cereal Industry," Journal of Industrial Economics, Vol. 28(2), December
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1979, pp. 113-134.
*Schmalensee, R., "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry,"
Bell Journal of Economics, Vol. 9(2), Autumn 1978, pp. 305-327.
Schmalensee, R., "Market Structure Durability and Quality: A Selective Survey,"
Economic Inquiry, Vol. 17(2), April 1979, pp. 177-196.
Shy, Oz, Industrial Organization, (Chapter 7 and 12).
Spence, M., "Product Differentiation and Welfare, "American Economic Review,
Vol. 66(2), May 1976, pp. 407-14.
*Tirole, J., The Theory of Industrial Organization, (Chapters 8 and 9).
Whinston, M., "Tying Foreclosure, and Exclusion," American Economic Review,
Vol. 80(4), September 1990, pp. 837-859.
VII.
Advertising and Information.
Adams, W. and Yellen, J., "What Makes Advertising Profitable?" Economic Journal,
Vol. 67(347), September 1977, pp. 427-49.
*Akerlof, G., "The Market for Lemons," Quarterly Journal of Economics, Vol. 84(3),
August 1970, pp. 488-500.
Arrow, K., "Vertical Integration and Communication," Bell Journal of Economics,
Vol. 6(1), Spring 1975, pp. 173-83.
Bagwell, K. and Ramey, G., “Coordination Economies, Advertising, and Search
Behavior in Retail Markets,” American Economic Review, Vol. 84(3), June
1994, pp. 498-517.
*Comanor, W. and Wilson, T., "The Effects of Advertising on Competition: A Survey,"
Journal of Economic Literature, Vol. 17(2), June 1979, pp. 453-76.
Dixit, A. and Norman, V., "Advertising and Welfare," Bell Journal of Economics,
Vol. 9(1), Spring 1978, pp. 1-17.
Grossman, S. and Stiglitz, J., "Information and Competitive Price Systems,"
American Economic Review, Vol. 66(2), May 1976, pp. 246-53.
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Judd, K. and Riordan, M., “Price and Quality in a New Product Monopoly,” Review of
Economic Studies, Vol 61(4), October 1994, pp. 773-89.
Martin, S., Advanced Industrial Economics, Chapter 9.
Milgrom, P. and Roberts, J. “Price and Advertising Signals of Product Quality,” Journal
of Political Economy, Vol. 94(4) August 1986, pp. 796-821.
*Nelson, P., "Advertising as Information," Journal of Political Economy, Vol. 82(4),
July/August 1974, pp. 729-54.
Rothschild, M., "Models of Market Organization with Imperfect Information:
A Survey," Journal of Political Economy, Vol. 81(6), Nov./Dec. 1973,
pp. 1283-1308.
Shy, Oz, Industrial Organization, (Chapters 11 and 16).
Spence, A., "Notes on Advertising, Economies of Scale, and Entry Barriers," Quarterly
Journal of Economics, Vol. 95(3), November 1980, pp. 493-508.
*Stigler, G., "The Economies of Information," Journal of Political Economy, Vol. 69(3),
June 1961, pp. 213-25; also in The Organization of Industry, Irwin, Chapter 16.
Telser, L., "Advertising and Competition," Journal of Political Economy, Vol. 72(6),
December 1964, pp. 537-562.
*Tirole, J., The Theory of Industrial Organization, Chapter 2, pp. 95-132.
Wilson, R., "Informational Economies of Scale," Bell Journal of Economics, Vol. 6(1),
Spring 1975, pp. 184-95.
VIII.
Information and the Principle-Agent Problem.
Fama, E., "Agency Problems and the Theory of the Firm," Journal of Political
Economy, Vol. 88(2), April 1980, pp. 288-307.
Grossman, S., and O. Hart, "An Analysis of the Principle-Agent Problem,"
Econometrica, Vol. 10(1), January 1983, pp. 7-45.
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Holmström, B., "Moral Hazard and Observability," Bell Journal of Economics, Vol.
10(1), Spring 1979, pp. 74-91.
Holmström, B., "Moral Hazard in Teams," Bell Journal of Economics, Vol. 13(2),
Autumn 1982, pp. 324-340.
*Rasmusen, E., Games and Information: An Introduction to Game Theory, 1989, Chapters 6
and 7.
Ross, S., "The Economic Theory of Agency: The Principal's Problem," American Economic
Review, Vol. 63(2), May 1973, pp. 134-139.
Shavell, S., "Risk Sharing and Incentives in the Principal and Agent Relationship,"
Bell Journal of Economics, Vol. 10(1), Spring 1979, pp. 55-73.
Shy, Oz, Industrial Organization, (Chapter 15).
IX.
Price Discrimination.
*Adams, W. and Yellen, J., "Commodity Bundling and the Burden of Monopoly,"
Quarterly Journal of Economics, Vol. 90(3), August 1976, pp. 475-498.
Blair, R. and Kaserman, D., Antitrust Economics, Irwin, 1985, pp. 258-280.
Burnstein, M., "The Economics of Tie-In Sales," Review of Economics and Statistics,
Vol. 42(1), February 1960, pp. 68-73.
*Oi, W., "A Disneyland Dilemma: Two Part Tariffs for a Mickey Mouse Monopoly,"
Quarterly Journal of Economics, Vol. 85(1), February 1971, pp. 77-96.
Philips, L., The Economics of Price Discrimination, Cambridge University Press, 1983.
Roberts, K., "Welfare Considerations of Nonlinear Pricing," Economic Journal,
Vol. 89(353), March 1979, pp. 66-83.
Shy, Oz, Industrial Organization, (Chapter 13 and 14).
*Tirole, J., The Theory of Industrial Organization, Chapter 3, pp. 133-168.
Williamson, O., "Predatory Pricing: A Strategic and Welfare Analysis," Yale Law
Journal, Vol. 87(2), December 1977, pp. 284-340.
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*Willig, R., "Pareto Superior Nonlinear Outlay Schedules," Bell Journal of Economics,
Vol. 9(1), Spring 1976, pp. 56-69.
Varian, H., “Price Discrimination and Social Welfare,” American Economic Review,
Vol. 75(4), September 1985 pp. 870-5.
X.
Vertical Integration and Restraints
Adelman, M., "The A & P Case: A Study in Applied Economic Theory," Quarterly
Journal of Economics, Vol. 63(2), May 1949, pp. 238-57.
Baye, M., Crocker, K. and Ju, J., “Divisionalization, Franchising, and Divesture
Incentives in Oligopoly,” American Economic Review Vol. 86(3), March 1996,
pp. 223-36.
Berry, C., "Corporate Growth and Diversification," Journal of Law and Economics,
Vol. 14(2), October 1971, pp. 371-84.
Martin, S., Advanced Industrial Economics, Chapters 12 and 13.
Marvel, H. and McCafferty, S., "The Political Economy of Resale Price Maintenance,"
Journal of Political Economy, Vol. 94(5), October 1986.
Schmalensee, R., "A Note of the Theory of Vertical Integration," Journal of Political
Economy, Vol. 81(2), March/April 1973, pp. 442-449.
*Stigler, G., "The Division of Labor is Limited by the Extent of the Market," Journal
of Political Economy, Vol. 59(3), June 1951, pp. 185-93; also in The Organization of
Industry, Irwin, chapter 12.
*Tirole, J., The Theory of Industrial Organization, Chapter 4, pp. 169-203.
Warren-Boulton, F., "Vertical Control with Variable Proportions," Journal of Political
Economy, Vol. 82(4), July/August 1974, pp. 783-802.
Williamson, O., "The Economies of Antitrust: Transaction Cost Considerations,"
University of Pennsylvania Law Review, Vol. 122(6), June 1974,
pp. 1439-96.
*Williamson, O., "The Vertical Integration of Production: Market Failure
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Considerations," American Economic Review, Vol. 61(2), May 1971, pp. 122-127.
XI.
Conglomerates and Multimarket Contact.
Bernheim, B. and Whinston, M., "Multimarket Contact and Collusive Behavior,"
Rand Journal of Economics, Vol. 21(1), Spring 1990, pp. 1-26.
*Blair, R. and Kaserman, Antitrust Economics, Irwin, 1985, chapter 17.
Bulow, J., Geanakoplos, J., and Klemperer, P., “Multimarket Oligopoly: Strategic
Substitutes and Complements,” Journal of Political Economy Vol. 93(3), June
1985, pp. 488-511.
Goldberg, L., "The Effect of Conglomerate Mergers on Competition," Journal of Law
and Economics, Vol. 16(1), April 1973, pp. 137-158.
*Phillips, O. and Mason, C., "Mutual Forbearance in Experimental Conglomerate
Markets," Rand Journal of Economics, Vol. 23(3), Autumn 1992, pp. 395-414.
Phillips, O. and Mason, C., “Market regulation and Multimarket Rivalry,” Rand Journal of
Economics, Vol. 27(3), Autumn 1996, pp. 596-617.
XII.
Antitrust.
*Areeda, P. and Turner, D., "Predatory Pricing and Related Practices Under Section 2
of the Sherman Act," Harvard Law Review, Vol. 88(4), February 1975,
pp. 697-733.
*Blair, R. and Kaserman, D., Antitrust Economics, Irwin, 1985, chapters 3 and 4.
Bork, R., The Antitrust Paradox, Basic Books, 1978.
Salop, S., White, L., Fisher, F. and Schmalensee, R., "Symposium: Horizontal Mergers
and Antitrust," Journal of Economic Perspectives, Vol. 1(2), Fall 1987, pp. 3-54.
Schmalensee, R., "Antitrust and the New Industrial Economics," American Economic
Review, Vol. 72(2), May 1982, pp. 24-28.
*Schmalensee, R., "On the Use of Economic Models in Antitrust: The Realemen Case,"
University of Pennsylvania Law Review, Vol. 127(4), April 1979, pp. 994-1050.
Turner, D., "Conglomerate Mergers and Section 7 of the Clayton Act," Harvard Law
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Review, Vol. 78(7), May 1965, pp. 1313-95.
Turner, D., "The Definition of Agreement Under the Sherman Act: Conscious
Parallelism and Refusals to Deal," Harvard Law Review, Vol. 75(4), February. 1962,
pp. 655-706.
XII.
Auctions.
Ashenfelter, O., “How Auctions Work for Wine and Art,” Journal of Economic Perspectives,
Vol. 3(3), Summer 1989, pp. 23-36.
Cassidy, R., Auctions and Auctioneering, University of California Press, 1967.
Klemperer, P., “Auction Theory: A Guide to the Literature,” Journal of Economic Surveys,
Vol. 13(3), July 1999, pp. 227-86.
Milgrom, P., “Auctions and Bidding: A Primer,” Journal of Economic Perspecitives, Vol. 3(3),
Summer 1989, pp. 3-22.
Phillips, O., Menkaus, D. and Coatney, K., “Collusive Practices in Repeated English Auctions:
Experimental Evidence on Bidding Rings,” American Economic Review, Vol. 93(3), June 2003,
pp. 965-79.
XIII.
Experiments in Industrial Organization
Grether, D. and Plott, C., “The Effects of Market Practices in Oligopolistic Markets: An
Experimental Examination of the Ethyl Case,” Economic Inquiry, Vol. 22(4), October 1984, pp.
479-507.
Holt, C., “An Experimental Test of the Consistent-Conjectures Hypothesis,” American
Economic Review, Vol. 75(3), June 1985, pp. 314-25.
Hong, J. and Plott, C., “Rate Filing Polices for Inland Water Transportation: An Experimental
Approach,” Bell journal of Economics, Vol. 13(1), Spring 1982, pp. 1-19.
Issac, R.M. and Smith, V.L., “In Search of Predatory Pricing,” Journal of Political Economy,
Vol. 93(2), April 1985, pp. 320-45.
Kagel J. and Roth, A. “The Handbook of Experimental Economics, Princeton University Press,
1995, Chapter 5.
*Mason, C. and Phillips, O., “Duopoly Behavior in Asymmetric Markets: An Experimental
Evaluation,” The Review of Economics and Statistics, Vol. 74(4), November 1992, pp. 622-670.
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Plott, C., “Industrial Organization Theory and Experimental Economics,” Journal of Economic
Literature, Vol. 2(4), December 1982, pp. 1485-1527.
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