John F. Kennedy School of Government Harvard University BGP

John F. Kennedy School of Government
Harvard University
BGP-201, Economics 1620
Industry Structure, Strategy, and Public Policy
Spring Semester 2015
Tuesday-Thursday 1:10-2:30 Littauer 382
F. M. Scherer
Belfer 416
617 - 495 1154
[email protected]
Office Hours: Tuesday-Thursday 2:40-4:30.
This course builds a systematic theoretical framework for analyzing the structure,
behavior, and performance of major industries. It provides insight into the industrial
policy interactions between government and industry. The course proceeds on an
industry case study basis, interweaving theory, history, and policy analysis. The
perspective will be both national and international. The prerequisite is API-101 or
Grading will be on the basis of two five-page (maximum 1,500 words) policy
papers, chosen from ten announced topics (see the appendix to this syllabus), with
weight of 15 percent on the first paper and 25 percent on the second, and a final
examination (60 percent weight). A term paper may be substituted for the final
examination following early consultation with the instructor. Exams and term papers
must be executed independently in accordance with Kennedy School rules.
The required text is F. M. Scherer, Industry Structure, Strategy, and Public Policy
(hereafter, ISSPP), which will be handled out in class after duplication by CMO. Other
assigned materials will be provided electronically on a web site (E), distributed in class
(ICD), or available on reserve in the library as reserve folders (RF) or books (R).
Week Beginning Monday:
Jan. 26
Introduction. Begin Agriculture.
F. M. Scherer, ISSPP, Chapters 1 and 2 (ICD).
Feb. 2 Continue Agriculture.
Excerpts from the Department of Agriculture Economic Research Service
report on the "2014 Farm Act" and the Congressional Research Service
February 12, 2014, report, "The 2014 Farm Bill ... Summary and Side by
Side" (ICD).
"The Age of Scarcity," Bloomberg Business Week, July 30, 2010, pp.
6-7 (E).
David Molden et al., "Water Scarcity: The Food Factor," Issues in
Science & Technology, Summer 2007, pp. 39-48 (E).
Feb. 9 Crude Oil.
ISSPP, Chapter 3.
Chris Brown, "North Dakota Went Boom," New York Times Magazine,
Feb. 3, 2013, pp. 22-31 (E).
Andrew Rosenberg et al., "Exposing Fracking to Sunlight," Issues in
Science and Technology, Fall 2014, pp. 74-79 (E).
Thomas Cambanis, "The Toothless Cartel," Boston Globe, October 26,
2014, Ideas Section (E).
"Winners and Losers," The Economist, Oct. 25, 2014, pp. 62-64 (E).
Feb. 16
Petroleum Refining.
ISSPP, Chapter 4.
Robert Axelrod, The Evolution of Cooperation, Chapter 1 (E).
Feb. 23
ISSPP, Chapter 5.
"The New Iron Age," Fortune, Nov. 14, 2007, pp. 113-124 (E).
Excerpts from World Steel Dynamics report, "Chinese Steel: More
Evidence of Slower Economic Growth" (ICD).
March 2
ISSPP, Chapter 6.
Kenneth Flamm, "Causes and Economic Consequences of
Diminishing Rates of Technical Innovation in the Semiconductor and
Computer Industires," excerpts from November 2014 working paper (ICD).
Richard van Atta and Marion Slusarczuk, "The Tunnel at the End of the
Light," Issues in Science & Technology, Spring 2012, pp. 53-60 (E).
Michal Lev-Ram, "Intel's Do-or-Die Duo," Fortune, Oct. 28, 2013, pp.
171-176 (E).
F. M. Scherer, "Abuse of Dominance by High Technology Enterprises,"
Journal of Industrial and Business Economics, March 2011, pp. 39-62:
HKS Faculty Working Paper RWP10-029 (E).
March 9
Continue Semiconductors. Start Computers.
ISSPP, Chapter 7.
M. L. Katz and Carl Shapiro, "Systems Competition and Network
Effects," Journal of Economic Perspectives, Spring 1994, pp. 93-115
March 16-22
March 23
Spring Break.
Computers and Beyond.
Gerald W. Brock, The Second Information Revolution, Chapter 8 (E).
Annabel Z. Dodd, The Essential Guide to Telecommunications (2012
ed.), pp. 4-19 and 305-335 (R).
Preview ISSPP, pp. 357-362.
"The Patent, Used as a Sword," New York Times, October 8, 2012, pp.
A1, 14, and 15 (E).
March 30
ISSPP, Chapter 8.
Studs Terkel, Working, pp. 159-168 and 187-194 (RF).
Steven Rattner, "The Auto Bailout: How We Did It," Fortune, Nov. 9,
2009, pp. 55-71 (E).
Malcolm Gladwell, "Overdrive," The New Yorker, Nov. 1, 2010, pp.
110-115 (E).
April 6 Automobiles (Continued).
Christopher Knittel, "Reducing Petroleum Consumption from
Transportation," Journal of Economic Perspectives, Winter 2012, pp.
93-118 (ICD).
U.S. White House, "Obama Administration Finalizes Historic 54.5 MPG
Fuel Efficiency Standards," and NHSTA, "NHSTA and EPA Set Standards
to Improve Fuel Economy and Reduce Greenhouse Gases ... for Model
Years 2017 and Beyond" (ICD).
John D. Graham et al., "No Time for Pessimism about Electric Cars,"
Issues in Science and Technology, Fall 2014, pp. 33-40 (E).
C. J. Kahane, "Vehicle Weight, Fatality Risk and Crash Compatibility of
Model Year 1991-99 Passenger Cars and Light Trucks," National Highway
Traffic Safety Administration Technical Report (October 2003), pp. vii-xxi
April 13
Pharmaceuticals: Domestic.
ISSPP, Chapter 9.
F. M. Scherer, "Pharmaceutical Innovation," Kennedy School Faculty
Working Paper RWP07-004 (E).
Ernst Berndt, "Pharmaceuticals in U.S. Health Care: Determinants of
Quantity and Price," Journal of Economic Perspectives, Fall 2002, pp.
45-66 (ICD).
Sam Peltzman, "By Prescription Only ... or Occasionally," Regulation,
1987, no. 3/4, pp. 23-28 (E).
Apr. 20
Pharmaceuticals: International.
Judith Wagner and Elizabeth McCarthy, "International Differences in
Drug Prices," Annu. Rev. Public Health (2004), pp. 475-495 (E).
Michael Kremer, "Pharmaceuticals and the Developing World," Journal
of Economic Perspectives, Fall 2002, pp. 67-90) (ICD).
F. M. Scherer, "Patents, Monopoly Power, and the Pricing of
Pharmaceuticals in Low-Income Nations," Kennedy School Faculty
Working Paper RWP13-029 (E).
Gardiner Harris, "The Safety Gap," New York Times Magazine, Nov. 2,
2008, p. M46 (ICD).
Apr. 27
ISSPP, Chapter 10.
"(Brew)Master of the Universe," Fortune, Sept. 2, 2013, pp. 75-82 (E).
"The Steve Jobs of Beer," The Atlantic, November 2014, pp. 22-27 (E).
May 4-15
Take-home final examination, date to be determined by in-class vote;
term papers due May 11.
Policy Paper Topics
(Due Date)
1. Grapes of Wrath (February 13). California, the fruit and vegetable basket of
the United States, has been hit by an unusually severe drought (only partly alleviated in
December 2014). Aggravating it beyond past droughts has been depletion of the
Sierra Nevada snow cap, the source of rivers that provide crucial water supplies inter
alia to the Central Valley. Given this problem and the likelihood of similar problems in
the future, what short-run and long-run measures should California governments take to
sustain the continued prosperity of their agricultural industry? Research for this paper
would benefit from reading a 1986 Kennedy School teaching case study, Water Pricing
in California (no. 710.0).
2. The Great Game 1 (February 19). In 2014-15 world petroleum prices
declined by more than 50 percent, in part because of recession-impacted world
demand, partly because new supplies in the United States reduced U.S. import
dependence, and partly because Saudi Arabia chose to cut prices rather than restricing
output and supporting its OPEC brethren. Analyze one of the following three issues:
(1) Is it likely that Saudi Arabia will revert to its former policy of keeping oil prices high,
or will it pursue a new and more aggressive output-oriented policy? What are the
consequences for world oil industry stability? (See i.a. Jeff Colgan, "The Emperor Has
No Clothes," International Organization, Summer 2014.) and "As Oil Prices Plummet,
Saudi Arabia Faces a Test of Strategy," New York Times, Oct. 16, 2014.) (2) Should
the United States reverse its four-decade-long policy and allow domestic producers to
export their crude oil output, among other things authorizing completion of the Keystone
XL pipeline carrying North Dakota oil (along with Alberta tar oil) to other pipelines
connected to Carribean ports? See i.a. the Senate Energy and Natural Resources
Committee debate on January 5, 2015.) (3) What posture should U.S. federal and
state governments take toward expanding wider production of "fracked" oil and gas,
given conflicting energy supply and environmental concerns?
3. The Great Game 2 (February 19) Russian support of separatists in eastern
Ukraine has led to western nation sanctions, against which Russia might retaliate inter
alia by sharply reducing its supply of natural gas to Western Europe (which it has done
on occasion in the past). Germany obtains 39 percent of its natural gas by pipeline
from Russia; 41 million of its dwelling units are heated through natural gas. Other
eastern European economies (including Ukraine) are even more dependent. What
policies should western European nations pursue to maintain natural gas supplies and
minimize the dangers of military conflict? Should they renew support of the
abandoned Nabucco pipeline to Europe from the Caspian, bypassing Russia? See
"How Putin Forged a Pipeline Deal That Derailed," New York Times, Dec. 31, 2014, p.
1. Should they emulate Lithuania's efforts, expanding capacity to imported liquified
natural gas? Germany has scheduled total phaseout of electricity generation through
nuclear power by 2022 (nuclear provided 30 percent of its electricity in 2003). (France
meanwhile passed a law requiring its nuclear generation ratio to decline from 75 percent
to 25 percent by 2025.) Should Germany reverse that policy change in the interest of
maintaining diversity of energy supplies? What other measures should be taken?
4. Steely Nerves Required. (March 5) In 2009, 46 percent of the world's steel
output came from greatly expanded Chinese installations. In 2013, China produced
approximately 790 million metric tons of steel and exported 62 million tons. It is
expected that China's huge apartment and road building programs will soon ebb, freeing
substantial capacity for additional exports. There have already been several
anti-dumping actions against Chinese steel exports. How should the world's nations
react to a surge of exported Chinese steel?
5. Intel an Illegal Monopolist? (March 12). Intel was fined 1.06 billion Euros on
May 12, 2009, by the European Commission on monopolization grounds, charged with
monopolization by the New York State attorney general's office on November 5, 2009,
and settled for $1.25 billion a law suit of longer standing with Advanced Micro Devices
Inc. on November 12, 2009. In August 2010, the U.S. Federal Trade Commission
announced a settlement of its own sweeping antitrust complaint. What did Intel do to
warrant such "piling on"? Should its role as a U.S. technology leader be viewed as a
valid defense? Should its lagging position in supplying chips for smart phones have
changed how the cases were adjudicated?
6. The Auto Industry Bailout (April 9). Should the U.S. government have
transferred more than $65 billion to rescue General Motors and Chrysler from
liquidation? Why, or why not? (Please exclude as a reason "because it helped re-elect
Barack Obama.") Would you have organized the government's emergency aid
program differently than bailout czar Steve Rattner did? (Compare the assigned
readings by Rattner and Gladwell.) Explain how you would have proceeded.
7. Miles per Gallon. (April 14) Will the U.S. auto suppliers (including foreign
companies) be able to sustain profitability while responding to demands that they
increase fleet average miles per gallon from 27.5 in the 1990s to 54.5 by 2025, among
other things by downsizing their offerings? How will U.S. consumers respond to the
8. Generic Drugs (April 23). The 1984 Hatch-Waxman Act made it much
easier to obtain approval of generic drug substitutes once relevant patents expire, and
the fraction of prescriptions filled generically in the United States escalated to 80
percent by 2013. A Paragraph IV of Hatch-Waxman allows would-be generic makers
to challenge the unexpired patents covering a branded drug, and confers on the first
such successful challenger a six-month head start over other generic makers. The
producers of patented drugs have in turn paid handsome sums to the first challengers to
withdraw from legal challenges and defer entry, which thereupon retards the entry of
other generics until questioned patents expire. The legality of such buyouts was
weighed inconclusively by the U.S. Supreme Court in 2013. (F.T.C. v. Activis, 133 S.
Ct. 2223). What policy would you recommend toward such "pay for delay" actions?
See the Federal Trade Commission Report, Generic Entry Prior to Patent Expiration
(2002); and Daniel Crane, "Patent Settlements," in Issues in Competition Law and
Policy, vol. 3, pp. 2109-2125 (2008) (at Law School).
9. Alleviating Disease in the Third World (April 30). More than 40 of world's
nations, mostly located in Africa and Asia, had GDP per capita of less than $1,000 in
2011. (India's average was $1,500; Pakistan's $1,200; the U.S. was $48,000.)
Disease is a major contributor to poverty. What measures would you recommend to
increase the supply of life-saving drugs and vaccines to the world's poorest citizens?
Explain why your choices will be efficacious. In addition to the assigned readings, see
Ruth Levine et al., Making Markets for Vaccines: Ideas to Action (Center for Global
Development: 2005).
10. Beer Wars Continued (May 4). In October 2014, AB Inbev, which controls
Anheuser-Busch, accounting for nearly half of U.S. beer supply, was organizing
financial support to acquire SAB Miller, the second largest U.S. beer supplier. If you
were responsible for setting U.S. competition (i.e., antitrust) policy, how would you
assess the merits and demerits of such a proposed merger?