1
Oregon State University
Department of Economics
Econ 460/560
Industrial Organization Theory and Policy
Instructor:
Time & Class Location:
Office & Office Hours:
Email:
Web Page:
Teaching Assistant:
Spring 2009
V. Tremblay
Professor V. Tremblay
T&R, 4-5:50 pm, Ballard Hall 118
Ballard Hall 319A; after class and Friday, 2-3 pm
V.Tremblay@OregonState.edu
http://oregonstate.edu/~tremblav/
Wenfeng Yan, yanwe@onid.orst.edu
Prerequisites: A working understanding of intermediate microeconomic theory and calculus (460
students will not be required to use calculus on exams).
Required Textbook:
[C&P] Carlton and Perloff, Modern Industrial Organization, Addison-Wesley, 2005, ISBN 0321180232.
Supplementary Books:
[S] Oz Shy, Industrial Organization: Theory and Applications, MIT Press, 1995, ISBN 026291795. Econ
560 students and undergraduate students who are interested in pursuing a graduate degree in
economics are encouraged to also read the Shy textbook.
[T&T] Victor J. Tremblay and Carol Horton Tremblay, The U.S. Brewing Industry: Data and Economic
Analysis, MIT Press, 2005, ISBN 0-262-20151-8.
[T&T-2] V. Tremblay and C. Tremblay, Industry and Firm Studies, M.E. Sharpe, 2007, ISBN 978-07656-1724-8.
[T&T-3] Tremblay and Tremblay, “Quantity vs. Price Competition in Static Oligopoly Models.”
John Sutton, Sunk Costs and Market Structure, MIT Press, 1992, ISBN 0-262-19305-1.
Jeffrey M. Perloff, Larry S. Karp, and Amos Golan, Estimating Market Power and Strategies, 2007,
IBSN-13: 9780521011143.
Course Objectives and Student Learning Outcomes: Students will demonstrate mastery of the models
of competition, monopoly, and oligopoly. Students will learn and demonstrate knowledge of the main
theories of market structure, firm strategy, and economic performance. Students will be expected to
explain how theory and evidence shape U.S. antitrust law and government regulation.
Grading: Your course grade will depend on class participation and your performance on assignments,
two midterm examinations, and a comprehensive final examination. The weights are as follows:
Class Participation
5%
Homework/Papers
30% You will be expected to do two homework assignments and
write a term paper. Please get approval of your term paper
topic by the end of the second week of classes.
Review Questions
Please study the review questions for this class, as you may find
one or more of them on future exams.
Exam 1
30% Thursday of the 5th week of classes.
Final Exam
35% Please check date/time in the schedule of classes.
You may not use books, notes, or electronic devices during the exams.
2
Make-Up and Extra Credit Policy: There is no extra credit available for this class. Make-up exams will
be considered for legitimate and verified reasons only. Please notify the instructor as soon as possible if a
make-up exam is warranted. Otherwise, you will receive a zero score.
University Guidelines: The university requires that I inform you of the following. (1) Academic
Dishonesty: Plagiarism, fabrication, cheating, and facilitating academic dishonesty of others are serious
offenses and may be punished by failure on the exam or project, failure in the course, and/or expulsion
from the university. For further information refer to the Schedule of Classes and
http://osu.orst.edu/admin/stucon/plag.htm. (2) Disruptive Behavior: Behaviors that are disruptive to
teaching or learning will not be tolerated and will be referred to the Student Conduct Program for
disciplinary action. Behaviors that create a hostile, offensive or intimidating environment based on
gender, race, ethnicity, color, religion, age, disability, marital status or sexual orientation will be referred
to the Affirmative Action Office. (3) Disabilities: If you have a documented disability which requires
special arrangements, please inform me the first week of classes. To obtain university documentation for
your disability, contact Services for Students with Disabilities at 541-737-4098.
Course Outline and Readings
(*Required Readings)
1. Introduction
A. Schools of Thought in Industrial Organization
*[C&P] Ch. 1; [S] Ch. 1
B. Econometrics Review
2. Economic Organization
A. The Organization Problem
F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review, September 1945.
B. Property Rights and Organization
H. Demsetz, “Toward a Theory of Property Rights,” American Economic Review, May 1967.
C. The Organization of the Firm
*[C&P] pp. 11-26, 139
R. Coase, “The Nature of the Firm,” Economica, November 1937.
3. Basic Demand and Cost Conditions
*[C&P] pp. 88-93; [S] Ch. 3, or the demand chapter in any intermediate microeconomics book.
4. Micro-Foundations of Product Markets
A. A Review of Perfect Competition, Monopoly, and Cartel Theory
*[C&P] Chs. 3, 4, 5; [S] Chs. 4 and 5
B. Game Theory and Oligopoly: Output vs. Price Competition
Introduction, Dominant Strategies, and the Nash Equilibrium
*[C&P] pp. 159-161; [S] pp. 11-22
Duopoly: Cournot and Bertrand
3
*[T&T-3] pp. 1 - ???
*[C&P] pp. 161-176; [S] Ch. 6
Mixed Strategies
[S] pp. 33-37
Dynamic Games
*[T&T-3] pp. ???
*[C&P] pp. 176-191; [S] pp. 22-33
Supermodular Games
P. Milgrom and M. Roberts, “Rationalizability, Learning, and Equilibrium in Games with
Strategic Compelementarities,” Econometrica, November 1990.
C. Tremblay and V. Tremblay, “The Neglect of Monotone Comparative Static Methods,
Journal of Economic Education, forthcoming.
5. Industry Structure
A. Meaning, Measurement, and Extent of Industry Concentration in the U.S.
*[C&P] pp. 225-259; [S] pp. 169-173
B. Causes of High Concentration: Barriers to Entry and Sunk Costs
*[C&P] pp. 268-272; [S] 182-206
J. Sutton, Sunk Costs and Market Structure, MIT Press, 1992.
C. Empirical Evidence
*[C&P] pp. 272-274
[T&T] Ch. 3
6. Price and Non-Price Competition
A. Price Wars, Trigger Strategies, and Non-Linear Pricing
*[C&P] pp. 142-146 and 336-338; [S] Ch. 13
[T&T] pp. 157-171; [T&T-2] pp. 61-67
B. Product Differentiation
*[C&P] pp. 200-206, 214-215, 220-230; [S] pp. 133-135 and Ch. 12
J. Beath and Y. Katsoulacos, The Economic Theory of Product Differentiation, Cambridge
University Press, 1991.
C. Brand Proliferation
R. Schmalensee, “Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry,” BJ, Spring
1978.
[T&T] Ch. 6; [T&T-2] pp. 56-61
D. Advertising
[C&P] Ch. 13
*[C&P] Ch. 14; [S] Ch. 11
Kyle Bagwell, The Economic Analysis of Advertising, Columbia University, 2005.
C. Aislabi and C. Tisdell, “Profit Maximization and Marketing Strategies: Demand Rotation and
Social Influences,” MDE, 1988.
J. Johnson and D. Myatt, “On the Simple Economics of Advertising, Marketing, and Product
Design,” AER, 2006.
Y. Zheng and H. Kaiser, “Measuring and Testing Advertising Induced Rotation in the Demand
Curve,” AE, forthcoming.
V. Tremblay et al., “Cournot and Bertrand Competition when Advertising Rotates Demand: The
Case of Honda and Scion,” Department of Economics, Oregon State University, 2009.
D. Akerberg, “Empirically Distinguishing Informative and Prestige Effects of Advertising,” RJ,
Summer 2001.
4
[T&T] pp. 171-187; [T&T] pp. 67-70
E. Mergers
*[C&P] pp. 20-29; [S] 173-182
K. Gugler, et al., “The Effects of Mergers: An International Comparison,” IJIO, 2003.
[T&T] pp. 187-203
7. Market Structure and Economic Performance
A. Measurement Issues
[C&P] pp. 244-254, 274-279
T. Bresnahan, “Empirical Studies of Industries with Market Power,” in R. Schmalensee and R.
Willig, editors, Handbook of Industrial Organization, Ch. 17, North-Holland, 1989.
C. Wolfram, “Measuring Duopoly Power in the British Electricity Spot Market, AER, 1999.
P. Peterson, “Event Studies: A Review of the Issues and Methodologies,” QREB, Summer 1989.
B. Efficiency
*[C&P] pp. 70-73, 92-94
[T&T] pp. 212-224
K. Clay and W. Troesken, “Further Tests of Static Oligopoly Models: Whiskey, 1882-1898,” JIE,
June 2003.
Perloff, Karp, and Golan, Estimating Market Power and Strategies, 2007.
C. Technological Change
*[C&P] Ch. 16; [S] Ch. 9
D. Equity and Social Responsibility
*[T&T] pp. 207-212
W. Comanor and R. Smiley, “Monopoly Power and the Distribution of Wealth,” QJE, May 1975.
8. Antitrust and Government Regulation
[C&P] Chs. 19 and 20
J. Baker and C. Shapiro, “Reinvigoration of Horizontal Merger Enforcement,” UC-Berkeley, October
2007.
5
Term Paper Requirements
Econ 460/560, Industrial Organization
V. Tremblay, Spring 2009
1. Term Paper Topics: Please select one of the following topics.
A. Industry Concentration: Provide a brief summary of the main theories that explain why
industry concentration is high in some industries and low in others. Based on your review of
recent empirical evidence, what are the main sources of high concentration in real industries?
Briefly state the policy implications of high concentration.
B. Quantity vs. Price Competition: Briefly compare and contrast the difference between output
and price competition in an oligopoly market with homogeneous goods and with differentiated
goods. Based on empirical evidence, which model appears to be most reasonable?
C. Non-Price Competition: Provide a brief summary of the theoretical relationship between market
price and another strategic variable (e.g., advertising, research and development, brand
proliferation, etc.). Based on your review of recent empirical evidence, does more of this
strategic variable lead to higher or lower prices?
C. Industry Study: Select a single U.S. industry and discuss how concentration has changed,
reasons for that change, and how the level of concentration has affected some aspect of firm
behavior or industry performance. The books by T&T-2 and Sutton listed on the first page of the
syllabus may be of help with this topic.
D. Your Own Topic: You may select your own topic, but it must related to the field of industrial
organization. You will need instructor permission by the third week of the term to choose your
own topic.
2. Term Paper Requirements: Your papers should be professionally done. That is, they should be free
from errors in logic, spelling, and grammar.
A. Length: Quality is more important than length, but here are my recommendations.
Econ 460: Approximately 4-8 typed pages of double-spaced text.
Econ 560: Approximately 6-12 typed pages of double-spaced text.
B. References: You must reference at least 5 journal articles in economics or a related field (not
business magazines) unless the analysis is primarily your own. Please use an EconLit search to
identify relevant literature from economics and business journals. You can get help with this
from an OSU librarian or go to http://osulibrary.orst.edu/research.php/db.php.
C. Style: Write your paper in the style of a journal article. The Rand Journal, the Journal of
Industrial Economics, and the Review of Industrial Organization are good examples.
1) Divide your paper into sections (i.e., I. Introduction, II. Literature Review (or Research
Results)... , and VI. Conclusion). Be sure to include a cover page.
2) Include a complete set of references.
3) Use footnotes to reference the sources of a fact, statistic, or idea that is not your own and to
reference the source of a direct "quote". Note that plagiarism is using another person's words
(or ideas) with the intent of claiming them as your own.
3. Deadlines:
A. Abstract: Please turn in a one-paragraph abstract that explains what you plan to do. This is due
by the beginning of class on the Thursday of the 3nd week of classes. If you plan to choose your
own topic, please get topic approval before writing up your abstract.
B. Paper: The paper is due by the beginning of class on the Thursday of the 9th week of classes.
6
TERM PAPER TIPS AND REQUIREMENTS
Ec 460/560: Industrial Organization Theory and Policy (IO)
Winter 2004
TERM PAPER TOPIC SUGGESTIONS:
1. Own Topic: You may select your own topic, but it must relate to industrial organization. Please see
me to discuss the specifics and possible references.
2. Survey Paper: Select a section of the reading list that interests you and write a survey paper on that
section: explain the main issue and why it is important, outline the evolution and current thinking on
the subject, and indicate what is left to be studied or understood.
3. Industry Study:
a. Select a single U.S. industry and discuss how concentration has changed, reasons for that change,
and how the level of concentration has affected some aspect of firm behavior or industry
performance?
b. Analyze the micro-brewing industry to determine why the number of firms increased so
dramatically in the 1980s and 1990s.
4. Use the "Event Study" or "NEIO" methods to either:
a. show how it has been used to analyze market power in a particular industry, or
b. determine the impact on stockholder wealth or firm profits of the failure of Firestone 500 tires in
1978 and the failure of the Firestone ATX tire in 2000.
5. Analyze why firms in a particular industry may behave differently. Game theory should be useful.
For manageability, you should focus on one particular type of behavior or particular example (e.g.,
why some firms brand proliferate and others do not).
6. In most consumer goods industries, national name brand producers charge a higher price for their
products than other producers. They also invest more in R&D. Discuss possible reasons for this
price or R&D difference. Pick a particular consumer product and determine if a typical national
brand is worth the higher price. You might want to use objective information about product quality
from Consumer's Reports. Those of you who have taken a course in econometrics could use this
Consumer's Reports' price, quality, and product characteristic information to analyze the impact of
quality on price.
7. Select a recent local or Oregon regulation and analyze if and why public institutions have responded
differently to the regulation than have private institutions. Briefly discuss the history of the
law/regulation, how particular institutions have responded, and why there was a different response.
8. Technical topics (for those with better mathematics backgrounds).
a. Analyze why real players of the ultimatum game do not reach the sub-game perfect equilibrium.
Useful references include: Guth, Schmittberger, and Schwarze, “An Experimental Analysis of
Ultimatum Bargaining,” JEBO, 1982, pp. 367-388; Kandori, Mailath, and Rob, “Learning,
Mutation, and Long-Run Equilibria in Games,” Econometrica, 1993, pp. 29-56; Binmore and
Samuelson, “An Economist’s Perspective on the Evolution of Norms,” J. of Institutional and
Theoretical Economics, March 1994, pp. 45-63.
b. Show how a particular theory from another social or behavioral science may be incorporated into a
new theory of product differentiation and/or advertising. For example, you might show how
cognitive dissonance theory (from psychology) many affect consumer behavior regarding product
choice (a good starting point would be to read Akerlof and Dickens, “The Economic
Consequences of Cognitive Dissonance,” AER, June 1982 and Matthew Rabin, “Cognitive
Dissonance and Social Change,” JEBO, 1994, pp. 177-194).
7
c. Show how persuasive versus informative advertising would affect the elasticity of demand. A good
starting point would be to read Grossman and Shapiro, “Informative Advertising with
Differentiated Products,” REStud, January 1994.
d. Analyze the comparative statics of a supermodular duopoly game. Useful references include: Eric
Rasmusen, Games and information: An Introduction to Game Theory, Cambridge, MA:
Blackwell, 1994, pp. 325-330; Milgrom and Roberts, “Rationalability, Learning, and
Equilibrium in Games with Strategic Complementarities,” Econometrica, November 1990.
TERM PAPER REQUIREMENTS:
1. Objective: Either do a survey of a topic relevant to IO or develop an IO topic on your own. Your own
creative ideas, criticisms, and analysis are encouraged, but you must support them with logic (a
model), data, or facts from previous studies.
2. Length:
ECON 460: about 5-8 typed, double-spaced pages of text
ECON 560: about 10-13 typed, double-spaced pages of text
Note that:
a. Your paper should be typed, double spaced, with 1-inch margins on all four sides.
b. Each page (except the title page) should be numbered.
c. Quality is more important than length.
3. References: You must reference at least 5 journal articles (not business magazines) unless the analysis
is primarily your own.
4. Style: Write your paper in the style of a journal article. The Journal of Industrial Economics and the
Rand Journal are good examples. That is:
a. Divide your paper into sections (i.e., I. Introduction, II. Literature Review (or Research Results)... ,
and VI. Conclusion).
b. Include a complete set of references.
c. Use footnotes to reference the sources of a fact, statistic, or idea that is not your own and to
reference the source of a "quote". Put your footnotes on a separate footnote page at the end of the
paper. Note that plagiarism is using another person's words (or ideas) with the intent of claiming
them as your own. The University views it as cheating with a minimum penalty of an F for the
assignment and a maximum penalty of dismissal from the University.
d. Organize your paper as follows: 1) cover page, 2) text of paper, 3) references, and 4) footnotes.
e. Staple your paper in the left hand corner, and do not use a plastic (or other) cover (which is
expensive).
5. Deadlines:
a. Turn in the "Term Paper Abstract" on time (due date is on reading list). This should be a
paragraph long and clearly state the main purpose of your study, the approach you plan to take
(survey article, develop own theoretical model, develop an empirical model to test an important
IO theory, or use data or other facts to support a policy position), and your expected conclusions.
b. The term paper is due at the beginning of the first class period of the 9th week of classes.
6. Time permitting, you will be encouraged to give a short (5-10 minute) oral report on your paper at the
end of the term.
8
GRADING STANDARDS FOR TERM PAPERS AND ESSAY EXAMS:
Your term paper grade will depend upon how thoroughly you survey the relevant literature, the quality of
your analysis, and the quality of your economic rhetoric. Here are some tips on rhetoric that may help
you write a better term paper and essay exam.
1. Be succinct (express your ideas clearly but briefly)-- you will be graded on what you say, not on
what you mean to say.
2. Pay attention to the style of the best writers in economics and other fields.
3. On term papers, use your dictionary, thesaurus, and a manual of style.
4. Know the main (representative) reader of your paper, and write to that person. For both your
paper and exams, write as if you are explaining your idea to an average student in the class.
Assume your reader knows a little but not everything about the subject.
5. Rewrite your papers-- most published papers are rewritten at least 5 times.
6. George Orwell laid out just six rules for writers. You are encouraged to follow them.
1) Never use a metaphor, simile, or other figure of speech which you are used to seeing in print.
2) Never use a long word where a short one will do.
3) If it is possible to cut a word out, always cut it out.
4) Never use the passive where you can use the active.
5) Never use a foreign phrase, a scientific word, or jargon word if you can think of an everyday
English equivalent.
6) Break any of these rules sooner than say anything outright barbarous.
If you plan to comment on someone else's work, you should follow John Kenneth Galbraith's "Rules of
Scientific Discourse."
1. One should not attack a position by slighting or adversely commenting on the personality or
behavior of the person who defends it.
2. One should be accurate.
3. Nothing should be allowed to rest on the unsupported word of the speaker, however great that
person's prestige.
4. Both over- and understatement should be avoided.
5. The scientist should be aware of, and disclose, personal interest. It is this, more than incidentally,
that may cause him to violate the other rules.
REGARDING LITERATURE SEARCHES AND DATA SOURCES:
1. You should do a literature search of your topic. At the Valley Library, you should check a standard
business/economics search engine (like Business (ABI Inform/BPI/NTDB and EconLit. The EconLit
index lists all economics publications since 1969 (that are listed in the Journal of Economics Literature,
HB 1 J58R) by author, title, and topic.
2. Regarding Institutional Information: If you need to get institutional information about an industry or
group of firms, you should check the following reference: Predicast's F&S Index (HG 41961 F91) on
the first floor (reference) of Valley Library. You can find financial data at the firm level from Moody's
Industrials. Many industries also publish trade journals with a great deal of institutional information
[like Modern Brewery Age (HD 9397.U5 M6) and Brewers Digest for the brewing industry]
Ask a librarian if you have questions or need assistance.
9
Endnotes:
1. Useful guides to Rhetoric include: D. N. McCloskey, The Writing of Economics, New York:
Macmillan, 1987; McCloskey, “Economic Writing,” EI, April 1985; Jack High, “The Costs of
Economical Writing,” EI, July 1987; McCloskey, “Reply to Jack High,” EI, July 1987; Thomas
Borcherding (editor of EI), “Managing Editor’s Comment on High and McCloskey,” EI, October 1987.
2. J. Galbraith, “A Review of a Review,” Pubic Interest, Fall 1967, no. 9, p. 110.
10
MAIN IO AND RELATED JOURNALS AT OSU
Initial
AA
AER
AB
ALE
AE
BJ(RJ)
BA
BD
BW
CJE
CR
EM
EA
EI
EJ
EER
F&S
FBS
FORT
ICC
IOR
IJIO
JB
JE
JEBO
JEL
JEP
JET
JEB
JFE
JIE
JLE
JMR
JPE
MDE
M
QJE
QREB
RESTUD
RESTAT
RIO
SEJ
SJE
SMR
SCB
SA
WSJ
Call Number
HF 5801 A2
HB 1 A5
HD 2709 A5
HD 2709 A53
HB 1 A6
HD 2763 A2 B4
TP 570 U48
TP 500 B68
HF 5001 B8
HB 1 C 3
TX 335 C68
HB 1 E2
HB 1 E4
HB 1 W4
HB 1 E3
HB 1 E8
HG 4961 F91
HF 5001 F57
HF 5001 F6
.
.
HD 28 I525
HF 5001 J6
HB 139 J67
HD 28 J594
HB 1 J58 R
HB 1 J643
HB 1 J587
HC 101 T4
HG 4501 J678
HD 1 J6
K J68
HF 5414 J62
HB 1 J66
HD 30.22 M35
HG 4961 M61
HB 1 Q8
HF5001 Q9
HB 1 R3
HA 1 R4
.
HC 107 A13 S6
H 8 S85
HD 28 I6
HC 1 A3
HA 202 REF
.
Title
Advertising Age
American Economic Review
Antitrust Bulletin
Antitrust Law & Economics
Applied Economics
Bell Journal (Rand Journal)
Brewers Almanac
Brewers Digest
Business Week
Canadian Journal of Economics
Consumer's Research
Econometrica
Economica
Economic Inquiry
Economic Journal
European Economic Review
F&S Index, Preducast's
Forbes
Fortune
Industrial and Corporate Change
Industrial Organization Review
International J. of Industrial Organization
Journal of Business
Journal of Econometrics
Journal of Economic Behavior and Organization
Journal of Economic Literature
Journal of Economic Perspectives
Journal of Economic Theory
Journal of Economics & Business
Journal of Financial Economics
Journal of Industrial Economics
Journal of Law & Economics
Journal of Marketing Research
Journal of Political Economy
Managerial and Decision Economics
Moody's
Quarterly Journal of Economics
Quarterly Review of Economics & Business
Review of Economic Studies
Review of Economics & Statistics
Review of Industrial Organization
Southern Economic Journal
Scandinavian Journal of Economics
Sloan Management Review
Survey of Current Business
Statistical Abstracts of the U.S.
Wall Street Journal (microfilm)