Industrial Organization: characteristics and contents Marc Escrihuela

Program
Course goals
1) Competitive analysis of firms in markets from both a theoretical and applied perspective.
2) Study of competitive markets and, especially, non-competitive, with special attention to the analysis of decisions under a monopoly and oligopoly context.
3) Understanding the consequences of strategic interdependence of firms in markets.
4) Ability to make applications of theoretical models in order to explain the actual market fundamentals and monitoring of regulation and competition policies that enhance their efficiency.

Program
Outline of the Course
Block 1: Introduction to Industrial Organization.
(Ch1 and Ch2).
Block 2: The monopoly power. (Ch3 and Ch4).
Block 3: The strategic interaction of oligopolies.
(Ch5 to Ch9)
Block 4: Competition policy (Ch10)

Program
Syllabus
Block 1. Introduction to Industrial Organization
Item 1. Industrial Organization: the nature and content
Item 2. Market structure
Block 2. Monopoly power
Item 3. Monopoly
Item 4. Price discrimination and product selection
Block 3. The strategic interaction of oligopolistic
Item 5. Homogeneous product oligopoly
5.1 Models of static oligopoly
5.2 Models of dynamic oligopoly
Item 6. Oligopoly with product differentiation and advertising
Item 7. Barriers to entry
Item 8. Mergers and acquisitions
Item 9. Technical change. R & D
Block 4. Competition policies
Item 10. Industrial policy and competition

Indicative Schedule

Program
Basic bibliography
- Luis Cabral, "Introduction to Industrial Organization", MIT Press, 2000.
- O. Shy, 'Industrial Organization: Theory and Applications', MIT Press, 1998.
- Luís Cabral, 'Economía Industrial', McGraw Hill, 1997.
- H. Varian, 'Introduction to Microeconomics'. Ed. Antoni Bosch..
Other bibliography
Prácticas de las asignaturas de Economía y Organización Industrial, Material Didàctic 153, UIB 2012. Marc Escrihuela, Maria Sard Bauzà, Maria Tugores Ques.

Program
Continuous assessment
Test 1: midterm exam (25%) at the end of chapter 5.1 (aprox.) (NR)
Test 2: mid-term exam (25%), in the last lecture of the semester (NR)
1 final exam (50%) including the whole course. (R)

Placement
INDUSTRIAL ORGANIZATION
First part: Introduction
Chapter 1. Industrial Organization: characteristics and contents
1.1. Definition of Industrial Organization
1.2. Aim of Industrial Organization
1.3. Main schools of thought
1.4. The S-C-R paradigm and its limitations
Chapter 2. The Structure of the markets
Chapter 3. The Monopoly

Structure
Chapter 1. Industrial Organization: characteristics and contents
1.1. -Definition of Industrial Organization
Relationship with microeconomics
Differentiated discipline

Structure
Chapter 1. Industrial Organization: characteristics and contents
1.1. -Definition of Industrial Organization
1.2. Aim of Industrial Organization
Existence of market power
Consequences of market power
The role of the state

Structure
Chapter 1. Industrial Organization: characteristics and contents
1.1. Definition of Industrial Organization
1.2. Aim of Industrial Organization
1.3. Main schools of thought
Background
Harvard school
Chicago school
Austrian school
New Industrial Economics

Structure
Chapter 1. Industrial Organization: characteristics and contents
1.1. Definition of Industrial Organization
1.2. Goal of Industrial Organization
1.3. Main schools of thought
1.4. The S-C-P paradigm and its limitations
Structure
Conduct
Performance
Exogenous conditions

Chapter 1. Industrial Organization: characteristics and contents
1.1. Definition of Industrial Organization
Industrial Organization ...
Comes from the English expressions “Industrial Economics” or “Industrial Organization” that are synonyms!
By industry is meant:
Set of firms that operate in the same market.
Industrial Economics ≡ Economy of markets

Chapter 1. Industrial Organization: characteristics and contents
1.1. Definition of Industrial Organization
It differs from classical microeconomics...
It analyzes basically market structures between the two extremes, monopoly and perfect competition
Those policies aiming to improve efficiency in the markets have a relevant role
Industrial Organization ≡ Economy of markets
with imperfect competition

Chapter 1. Industrial Organization: characteristics and contents
1.2. Goal of Industrial Organization
The main questions for the IO are:
Is there market power?
2. Which are the consequences of market power?
3. What can the government do in order to improve the inefficient situations?

Chapter 1. Industrial Organization: characteristics and contents
1.2. Goal of Industrial Organization
The main questions for the IO are:
Is there market power?
The first welfare theorem says that in absence of market power we have an efficient allocation
An approach to the loss of efficiency caused by market power consists of analyzing the difference between price and marginal cost.

Chapter 1. Industrial Organization: characteristics and contents
1.2. Goal of Industrial Organization
The main questions for the IO are:
2. Which are the consequences of market power?
We emphasize:
Production inefficiency (in resource allocation)
Transfer from consumers to producers
Monopolization costs
Natural monopoly
Dynamic efficiency

Chapter 1. Industrial Organization: characteristics and contents
1.2. Goal of Industrial Organization
The main questions for the IO are:
3. What can the government do in order to improve the inefficient situations? Benefits and costs should be evaluated for every situation.
Main measures of public intervention:
Competition policy: prohibitions, merger assessments, evaluation of agreements among firms,...
Industrial policy: subsidies, incentives,..
Regulation of firms and/or markets: price control, properties, entry, regulation of private firms,...

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
We develop a brief history of IO
The 5 main stages of the development of the IO schools of thought are:
Background:
Harvard school:Bain, Mason, Galbraith (40’s)
Chicago school: Stigler, Demsetz (50’s)
Austrian (European) school: Schumpeter, Scherer, Jacquemin, Segura(60’s y 70’s)
New Industrial Economics: Tirole (80’s)

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
1. Background in the Industrial Economics:
Cournot(1838): Use of maths to study economy, price formation with just one supplier and oligopoly with simultaneous quantity setting
Bertrand (1883): oligopoly and with simultaneous price setting
Stackelberg (1934): sequential setting of quantities
Hotelling (1929) and Chamberlin (1933): product differentiation

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
2. Harvard school: Bain, Mason, Galbraith (40’s)
Emphasizes empirical work
The structure (entry barriers, concentration and product differentiation) are key to identify market behaviour and consequently its results
S⇒C⇒P
It promotes public intervention in the structure in order to obtain the desired results.

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
3. Chicago school: Stigler, Posner, Peltzman, Demsetz (50’s)
The perfect competition model is a good approach to how markets operate in absence of public intervention through imposing entry
The market power, if exists, is temporary due to the threat of new firms entry
The government should try not to intervene in market regulation

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
4. European or Austrian school: Schumpeter, Scherer, Jacquemin, Segura(60’s y 70’s)
Firstly by Schumpeter (1934, 1942)
Emphasis in the dynamic aspects of the economy
Market power is temporary in an Economy in constant progress
The Economy is a process of creative destruction
The expectations of achieving a dominant position are an incentive for the firms to improve their products and processes

Chapter 1. Industrial Organization: characteristics and contents
1.3. Main schools of thought
5. The new IO: Tirole (80’s)
It is the dominant vision nowadays
It recaptures the SCP paradigm with some now ideas of posterior schools: potential competition and dynamic aspects
Main methodological progress:
Theory: Game theory
Empirical: Econometric tools

Chapter 1. Industrial Organization: characteristics and contents
1.4. The S-C-P paradigm and its limitations
PARADIGM: Simplified model or work method accepted by consensus for the specialists of the area.

Chapter 1. Industrial Organization: characteristics and contents
1.4. The S-C-P paradigm and its limitations
The SCP paradigm is a system of market analysis that systematizes and articulates the relevant aspects of the IO
The idea is that every sector is characterized by its structure, the behaviour of the firms that constitute the sector and for a list of indicators that measure the results (or the functioning) of the market
All aspects are related with each other and they are also a function of certain conditions exogenous to the market like the technology, the demand structure or the public intervention.