ECON 332: Industrial Organization
Instructor: Dr. Monica Hartmann
Class Schedule for Fall 2012 (9/5-12/14)
Time:
TR 9:55-11:35 p.m.
Location:
OEC 319
Contact Information:
Office Hours: T 5-6 p.m., W 2-3 p.m. and by appointment in OEC 402
Office Phone: 651-962-5681
E-mail: mehartmann@stthomas.edu
Course Description: Industrial Organization is the study of market structure, firm strategy, and market
performance. We will use the tools of microeconomics and game theory to examine the nature of
strategic interaction among firms. Some of the topics we will cover include business practices like
mergers and acquisition, advertising, product selection, innovation, vertical restraints, cartels, and
exclusionary conduct. Though this course is theoretical, one should be able to apply the economic
concepts to real-world examples.
We will study the causes and consequences of firms’ strategic behavior, focusing on situations in
which the assumptions behind perfect competition do not hold. Our main analytical tools will be
microeconomic theory and game theory. We will supplement our theoretical work with empirical
evidence from academic research and the popular press.
The topics we will study include: pricing, product design, imperfect competition, collusion and
cartels, mergers, network effects, and advertising. Within each topic we will consider the impact of
firms’ actions on consumer welfare. We will also consider the motivation for and impact of US
antitrust law on these settings.
Economics is more a way of thinking rather than a collection of facts, and industrial organization (IO)
is no exception. While some historical information is important to IO, our main objective is to
develop your ability to use economic models to understand a broad range of problems. These models,
when constructed well, can be both simple and powerful. Your ability to construct, analyze, and
interpret models is best developed through practice, and our class meetings, assignments, and exams
will focus on providing this practice.
I will require you to use basic calculus during this course. If you have not taken calculus or you
have forgotten how to take a derivative, I will teach you how to do this.
Upon completion of this course you should be able to do the following:
1. Identify the economic rationale (or lack of rationale) behind any particular business practice
that you read in the newspaper or learn about in a business class.
2. Take a simple Cournot (Bertrand) model for example and generalize it to a more realistic
model and use the insights gained from these generalizations to explain real world events.
3. Write an Industry Report for the Federal Trade Commission that describes the nature of the
competition, the cost structure, the product’s demand, and the horizontal, vertical, and
geographic boundaries of the market.
4. Write a brief for the Department of Justice’s Antitrust Division commenting on the
competitive effects of a proposed merger, acquisition, or business practice.
Textbook: The required text, Industrial Organization, by Luis Cabral is available in the bookstore.
You also must purchase a packet of Harvard Business Cases (HBC) at the bookstore. Additional
supplemental readings can be downloaded from the class webpage.
Supplementary References: They have been placed on reserve at the library.
Adams, Ed., The Structure of American Industry (12th edition)
Duetsch, Ed., Industry studies
Scherer, Competition Policy, Domestic and International
Case and Fair, Principles of Microeconomics and Principles of Macroeconomics
Grading:
Midterm
Final
Industry Report
Homework
Effective Class Participation
25%
25%
20%
20%
10%
Exam Policy: Make up examinations only will be given in the event of a severe illness, death in the
family, or a University sponsored activity. You must speak directly to me at least 24 hours prior to
the exam. Leaving a message on my voice mail or sending me email is not sufficient. If approved,
we will reschedule the exam at a mutually convenient time. If no arrangements have been made prior
to the scheduled exam time, no make-up exam will be given without a medical excuse. You will
receive a zero for that grade. Also note that possessing a refundable plane/train/bus ticket is not a
valid excuse for a make-up exam.
You are responsible for all material or announcements given in lecture regardless if present.
Homework: Homework assignments are given to prepare you for the exams and to provide an
opportunity to practice applying economic concepts to business matters. Some of the questions will
be computational and others will require written analysis. Illegible work is unacceptable and will be
given no credit. I do not foresee this to be a problem given that this is an upper level class. I am just
trying to be explicit about my expectations.
Late Assignments: The policy of this course is that late assignments will be penalized 1/3 of a letter
grade each day the assignment is late. But once the key has been distributed to the class no late work
will be accepted. No exceptions.
Newspaper: Copies of the Wall Street Journal, Star Tribune, Pioneer Press, the Economist, and the
New York Times are available at the library. You should get in the habit of reading one of these news
sources and identifying the economic issues underlying current business news. Seeing the
applications to 'real world' situations will help you grasp the economic theory. Also for your
industry analysis project, you should be following the news of your assigned industry.
Classroom Sessions and Expectations:
Classroom sessions will be a mix of lecture,
demonstrations, large group discussions, and small group work. Everyone will be responsible for
reading the textbook before each class and actively participating in classroom discussions. Your
class participation grade will be a combination of my analysis of your preparation for class,
contribution to class discussion, and fulfillment of in-class assignments.
Effective Class Participation: Class participation is an important component of learning. I
encourage active discussion during class sessions and may call on some quieter participants to enrich
the discussion. You always have the option to pass if called upon, but if you continuously pass when
called upon this will result in a lower participation grade. I expect frequent participation over the
semester, but you should note that monopolization of class discussions generates negative
externalities, which reduce overall class welfare and will not be appreciated. Your class
participation grade will be a combination of my analysis of your preparation for class,
contribution to class discussion, fulfillment in-class assignments, and knowledge of the assigned
industry and ability to relay this information to the class.
Even though I may call on students, it is still your responsibility to actively participate in classroom
discussions by raising your hand to answer questions and posing questions of your own.
Why is class participation important? First of all, participation enables students to learn from each
other. As intelligent individuals with diverse academic and personal backgrounds, you bring
different perspectives on an issue. Through an exchange of ideas we can all learn more. Second,
studies show that students who are actively involved in learning are more likely to remember and to
assimilate the material and to apply concepts learned in the classroom to other situations. Because
the ability to apply the course material to everyday situations is a primary goal of the course,
participation in class discussions is an essential part of learning.
As economists, we also can look at the importance of classroom participation in a different way.
When a student decides to participate – to share information with the class or ask a question, the
student is providing a public good. Other students benefit from the information presented and the
answers given to the questions. Unfortunately, the student makes his/her decision only with respect
to his/her own benefit and do not take into account the impact on others. Rewarding classroom
participation can help alleviate this market failure in the classroom. Finally, when students are
prepared for class, are actively engaged in assignments, and are actively involved in the discussion
with the professor and other students, everyone benefits and learning is enhanced.
Office Hours: If you need to talk with me, you can speak with me just before and after class, or come
to my office hours. You also may stop by my office during other times. If I am not available to talk
with you at that time, we can set an appointment for another time. One last point I want to make is
that office hours are time I have set aside for you to help you learn and master the material. Office
hours, however, are not to be used to obtain tutorial help for classes skipped. You are expected to get
the notes from your classmates and read them first and then you can ask me questions about them.
Classroom Etiquette: My goal is to maintain a classroom environment that provides a good learning
environment for everyone. To minimize distractions, you must turn off all cell phones, laptops, and
other electronic devices during class. I expect you to arrive on time and prepared for the day’s class.
Disability Services: Classroom accommodations will be provided for qualified students with
documented disabilities. Students are invited to contact the Disability Resources office about
accommodations for this course. Telephone appointments are available to students as needed.
Appointments can be made by calling 651-962-6315 or 800-328-6819, extension 6315. You may also
make an appointment in person in Murray Herrick 110. For further information, you can locate the
Disability Resources office on the web at http://www.stthomas.edu/enhancementprog/.
The Center for Writing: Peer consultants in the Center for Writing provide free one-on-one
conferences with writers at any stage of the writing process for any course. Make appointments
online 24/7 on their web site www.stthomas.edu/writing
The Center for Writing is in JRC 361, with Sunday hours in O’Shaughnessy-Frey Library.
Mondays – Thursdays 9 am – 8 pm JRC 361
Fridays 9 am – 12 noon
JRC 361
Sundays 6 pm – 9 pm
OSF Library
Bring a copy of the writing assignment to your appointment and any supporting material you have.
You do not need to have a draft of your paper in order to see a consultant. Questions? Call (651)
962-5601 or email writing@stthomas.edu.
Class Website: http://courseweb.stthomas.edu/mehartmann/io/io.html
Assignments, answer keys, and supplemental readings will be posted on this website.
Industry Report
Over the course of the semester, you will write an Industry Report that describes the nature of the
competition, the cost structure, demand, and the horizontal, vertical, and geographic boundaries of
the industry you analyzed. The assignment has been broken down into three parts. Industry selection
will be made in class on Tuesday, September 18. You will be viewed as the industry expert and may
be called upon to provide your classmates with information on your industry.
Section I: First Draft due 10/5
You will provide background information on your industry.
Section IA - Define/describe your industry. Discuss the market in terms of horizontal, vertical, and
geographic boundaries. Discuss upstream and downstream industries, where applicable. (For example,
if it is a retail product, there is no downstream industry.) Choose the measure(s) of output that you
believe to be the most descriptive of your industry and explain reasoning behind choice.
Section IB - Describe substitutes and complements.
Section IC - Write a brief history of the industry. Describe how and when it started. Discuss how the
industry has evolved over time and the direction in which it is heading.
NOTE: All of these issues have to be addressed before you can start analyzing the form of competition
that takes place. If these issues have not been addressed (or only given cursory attention), you will have
difficulty writing section 2 and 3 and consequently will be behind your classmates.
Grading of first draft: Pass/Fail (3% of project grade) If you turn in a passing paper late, but
within 3 days of the deadline, you can earn 1.5% percentage points.
Grading Criteria: 1) You must address all issues requested, 2) use at least 3 sources, and 3) write
at least 2.5 pages.
Section II: First Draft due 11/2
Section IIA - Identify the major firms in the industry. Determine to the extent possible the relative
market shares of these firms. Discuss the degree of concentration in the industry using n-firm
concentration ratios, H-indices, etc. Choose the measure(s) that you believe to be the most descriptive
given your industry and explain reasoning behind choice. Has the industry always been this
concentrated, or has the level of concentration changed over time? If so, why or why not? Explain.
Have the top firms always been the same, or have the dominant firms changed over time? Explain.
(If you cannot find data such as market shares for the leading firms, please let me know ahead of time
the sources you explored. If I agree that the data is not accessible, you will be given full credit for that
part of the paper.)
Section IIB- Discuss demand in the industry. Is it elastic or inelastic? (You probably will not find much
evidence or information on demand. You will have to infer this from your knowledge of the industry.
For example are there close substitutes? Are products necessities or luxuries?) Is demand growing or
declining? Do consumers have similar preferences or do consumers differ a lot in preferences?
Section IIC - Discuss the cost structure of the industry. (Obviously, this will be a qualitative discussion.
I do not expect you to provide information on the cost functions. You should be able to infer this from the
average size of firms, the range of products they sell, etc.) What are the significant cost factors (e.g.,
specific raw materials, R&D expenditures)? Are there are economies of scale or economies of scope?
Where do these economies come from (e.g., high entry costs, high R&D costs)?
Grading of first draft: Pass/Fail (4% of project grade) If you turn in a passing paper late, but
within 3 days of the deadline, you can earn 2% percentage points.
Grading Criteria: 1) You must address all issues requested, 2) use at least 3 sources, and 3) write
at least 4 pages.
Section III: First Draft due 11/30
Section IIIA - Describe the nature/form of competition in the industry. Do firms compete on price or
quantity? Explain. Assess the possibility of collusion in the industry. Refer to the characteristics we
discussed in class which may help or hinder collusion. Who are potential entrants into the industry and
what, if anything is done to deter entry?
Grading of first draft: Pass/Fail (3% of project grade) If you turn in a passing paper late, but
within 3 days of the deadline, you can earn 1.5% percentage points.
Grading Criteria: 1) You must address all issues requested, 2) use at least 2 sources, and 3) write
at least 2 pages.
FINAL DRAFT for all three sections plus introduction and conclusion are due December 7th --- Late
papers will lose 1/3 of a letter grade per day (or equivalent 3.33 points). For example, if a B paper is
turned in on Wednesday but was due on Tuesday, it will get a final grade of B-.
Evaluation criteria used for grading papers:
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Due Date: Drafts and final versions are due by 5 p.m. on the due date.
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Paper Length: The entire project should be 10 to 15 pages. Shorter papers are unacceptable,
while longer papers are strongly discouraged. You should focus your efforts on strengthening
your economic analysis rather than writing an encyclopedic description of the industry.
o The paper length does not include graphs, charts, figures, etc. that should be placed in a
separate appendix.
o Bibliography should be started on a separate page as well as each Appendix and each
section/ chapter of the paper.
o Miscellaneous: Paper should be double spaced, have no spaces between paragraphs, have
1 inch borders on all sides, and have a font size between 10 and 12 pt.
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Grading: The Industry Report is worth 100 points of which 10 points are based on
completion of drafts (pass/fail). The remaining 90 points is for the final version of the paper.
It will be graded on quality of writing (20 points) and economic analysis (70 points).
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Expectations about Paper Quality (Writing and Analysis):
o Clear and concise writing will be rewarded. Vague, rambling, or excessively wordy
papers will be penalized. The papers are quite short and you should not waste paper on
topics that are not directly related to the paper topics.
o Know that merely defining economic concepts in your paper is not the same as
applying them to the topic at hand. See additional comments on page 10 on how to
improve the quality of the economics analysis.
o One cannot just simply throw out economic words and economic definitions and just
assume that the reader will make connection between ideas. You, as the author, are
responsible for developing and articulating your economic analysis. This will take
time and therefore, I highly recommend writing several drafts of your paper.
Furthermore, this will allow you to provide a coherent analysis and not a grab-bag
survey of the industry.
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Basic Expectations: Because this is an upper-division course, I expect the following:
o Correct grammar is expected. Egregious grammatical mistakes will be penalized.
o The final paper should have an introduction, body, and conclusion. Do not
underestimate how a well written introduction and conclusion impacts the “reception”
of the ideas you present. The conclusion should wrap and synthesize what you learned
about the economic issues relevant for your industry. One also should have
transitional sentences linking distinct topics addressed in the paper.
o It is the writer’s responsibility to provide factual support for all claims. In addition,
information must be documented using the MLA style. Sources should be varied, and
you should not rely primarily on a single source. You may wish to conduct interviews of
business personnel who are knowledgeable of the industry you are analyzing. If you have
any questions about this or need clarification, come see me. If you have difficulty finding
data sources, you must come see me prior to turning in the paper.
o Include a bibliography of all sources used in assignment using MLA citation style. The
rule of thumb for writing a bibliography is that you must provide the reader enough
information about the source that person can find the source him/herself. Consult your
Freshmen Grammar Textbook for more information on citation styles.
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Performing Industry Analysis:
o If key issues or data are not included, the paper will be penalized. Any relevant
information that I can find by looking in obvious sources (Wall Street Journal, The
Economist, etc.) should be discussed. For example, you will lose points if you write
about the airline industry and do dot mention the recent consolidation activities and
bankruptcies.
o Also, do not fall into a “business administration” mode and focus your analysis on one
company within the industry. That is not what this course is about.
o Scholarly books and articles can be found that deal with some industries. Also a good
deal of helpful information and data appear in business trade periodicals – reading a
run of them will often reveal patterns of behavior, even when individual articles seem
to be merely bits and pieces. Besides general business magazines, such as Business
Week and Fortune, for most industries there exists one or more specialized trade
magazines that provide extensive evidence (and sometimes useful data) on current
behavior patterns and structural changes in the market.
o UST Libraries have a wealth of print and online books, journals, and research
databases available for your use on this assignment. Visit the industry research page
at http://www.stthomas.edu/libraries/guides/business/industry.html. For assistance
with your research, feel free to contact the library reference desk in person, by phone
at 651-962-5001, or via chat from the Library home page. For an appointment with
the economics librarian liaison, contact John Heintz, jpheintz@stthomas.edu, 651962-5018.
o JJ Hill library is also well stocked with trade information. See www.jjhill.org for card
catalog, hours, and location.
Additional Comments to Improve Quality of Your Analysis:
 Three examples of vague statements and weak economic analysis.
o “Spending on health care is a public good.” => Why is it a public good? It is the
author’s responsibility to provide justification for his or hers assertions.
o “There are economies of scale present in the airline industry." => Why? No support has
been given to back up this assertion.
o “There are economies of scale present in the airline industry. Average costs drop as
quantity of production rises.” => This statement is still vague. No support has been given
to back up assertion that average costs fall as production increases. There needs to be a
statement discussing fixed costs.
o “There are economies of scale present in the airline industry. Marketing and advertising
costs are fixed and will be realized regardless of the number of people on the plane. If
the number of passengers increases, these costs can be spread over a larger output
thereby decreasing average cost.” => Evidence has been provided to support assertion
that economies of scale are present.
o Summary: one cannot just simply throw out economic words and economic
definitions and just assume that the reader will make connection between ideas.
You, as the author, are responsible for developing and articulating your
economic analysis. This will take time and thus, I highly recommend writing
several drafts of your paper.
List of Possible Industries to Research:
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Accounting Firms
Agricultural Business: e.g., Cargill, ADM
Aircraft Manufacturers
Airlines (This option is not available.)
Apparel: women, men, design v. production
Athletic shoes
Automotive
Banking
Beverages: Beer, Soft drinks, Coffee Shops
Cell Phones
Cigarettes
Commercial Banking
Computer: Software, Hardware
Consulting
Consumer Electronics: TV/DVD, Video
Games
Cruise Lines
Diapers
Food: Fast Food, Breakfast Cereals
Food Trucks
Gaming
Glass
Greeting Cards
Grocery Store
Health Care: Nursing Homes, Hospitals,
Insurance, Pharmaceuticals
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Home Furnishing Stores
Hotels
Insurance – Property and Life
Internet: Auctions, Online Trading
Mattresses
Motion pictures
Music: Electric and Acoustic Guitars
Paper
Pet foods
Plastics
Public Accounting
Publishing
Restaurants
Retail: Clothing, (e.g., Target, Wal-Mart),
Electronics, (e.g., Best Buy, Wal-Mart),
Gasoline Stations
Shipping: Ship, Rail, Ground
Sports
Steel
Telecommunication: Telephone, Cable, &
Satellite (all together), Radio Stations
Tires
Toys
Utilities
Video Rentals (E.g., Redbox, Netflix)
Wine
Course Outline:
This is a rough estimate of how much time will be devoted to each subject material.
I.
Tax Policy (1 lecture)
II.
Introduction - chapter 1 (l lecture)
 Calculus Review - Newton Leibniz & Usain Bolt: Why we study differential calculus
http://www.khanacademy.org/math/calculus/v/newton-leibniz-and-usain-bolt
 Conduct, structure, and performance
 Old v. New Empirical IO
III.
Market Structure - Chapter 2 (2 lectures)
 Application: “The U.S. Airline Industry in 1995” Harvard Business Case
 Application: Live Nation and Ticket Master Merger (‘09); SWA-AirTran Merger (’11’12); proposed USAir-AA merger (’12)
 Application: “Local Restaurants Find Big Chains Eating Their Lunch” WSJ 7/9/02
IV.
Theories of Business Strategy in Oligopoly Markets (5 lectures)
 Chapter 4: Game and Strategy
 Chapter 7: Oligopoly Competition
 Stackelberg oligopoly ((Download from class webpage)
 Dominant theory (Download from class webpage)
 Application: NYC garbage antitrust lawsuit
V.
Entry Deterrence (2 lecture)
 Chapter 15: Strategic Behavior, Entry and Exit (except section 15.3)
 Application: American Airlines - Entry deterrence and predatory pricing case
 Application: Intel, Hawaiian Airlines – predatory pricing WSJ 2009
 Application: Amazon’s predatory e-book pricing (’11-’12)
Midterm (October 23rd)
VI.
Collusion and Cartels - (3 lectures)
 Chapter 8
 Application: DeBeers Harvard Business Case
 Application: Alleged collusion by Apple and publishers with respect to e-books
 Application: Sotheby’s and Christie’s Are Sued For Allegedly Fixing Commissions”
WSJ 2/2/00
VII.
Product and Pricing Strategies (3 lectures)
 Chapter 12: Product Differentiation
 Application: TV programming Schedule
 Application: Food Trucks
VIII.
Advertising (2 lectures)
 Chapter 13
 Application: Classroom Experiment
IX.
Network Externalities (2 lecturers)
 Chapter 17: Networks and Standards
 Application: Classroom Experiment
X.
Antitrust – (4 lectures)
 Introduction to American v. European Union Competition rules
 Chapter 15.3: Mergers and Acquisitions
 Additional Readings will be downloaded from class webpage
 Application: EU Commission’s Block of GE merger with Honeywell
 Application: EU Commission’s investigate proposed merger between Ryanair and Aer
Lingus (’12)
Final (December 20th at 10:30 a.m.)
Important Dates (Subject to Change):
 Midterm: Tuesday October 23rd
 Final: Thursday, December 20th
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Homework #1 Due: Friday, September 21st
Homework #2 Due: Friday, October 12th
Homework #3 Due: Friday, November 9th
Homework #4 Due: Wednesday, November 21st
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Industry Study Topic Chosen in Class: Tuesday, September 18th
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Industry Study, Part 1 Due: Friday, October 5th
Industry Study, Part 2 Due: Friday, November 2nd
Industry Study, Part 3 Due: Friday, November 30th
Industry Study Final version Due: Friday, December 7th