Industrial Organization: contemporary theory and practice (3rd edition)

1
Industrial Organization contemporary theory and
practice (3rd edition)

• Lynne Pepall
• Dan Richards
• George Norman

2
Introduction

• How firms behave in markets
• Whole range of business issues
• price of flowers payment to be official sponsor
  of major events
• which new products to introduce
• merger decisions
• methods for attacking or defending markets
• Strategic view of how firms interact

3

• How should a firm price its product given the
  existence of rivals?
• How does a firm decide which markets to enter?
• Incredible richness of examples
• Microsoft/Netscape/Sun
• ADM (collusion)
• Toys R Us (exclusive dealing)
• American Airlines (predatory pricing)
• Merger wave
• At the heart of all of this is strategic
  interaction

4

• Rely on the tools of game theory
• focuses on strategy and interaction
• Construct models abstractions
• well established tradition in all science
• physics
• engineering
• are SUVs safe?
• Do seat-belts/Volvos save lives?

5
The New Industrial Organization

• The New Industrial Organization is something of
  a departure
• theory in advance of policy
• recognition of connection between market
  structure and firms behavior
• Contrast pricing behavior of
• grain farmers at first point of sale
• gas stations Texaco, Mobil, Exxon
• computer manufacturers
• pharmaceuticals (proprietary vs. generics)

6

• Do not say much about the internal organization
  of firms
• vertical organization is discussed
• internal contracts are not

7
Anti-trust Policy an overview

• Developments in modern IO are sensitive to the
  policy context
• Microsoft and ADM
• highlight aspects of developments in policy/law
  and economic theory
• Need for anti-trust policy recognized by Adam
  Smith (1776)
• The monopolists, by keeping the market
  constantly understocked, by never fully supplying
  the effectual demand, sell their commodities much
  above the natural price.

8

• People of the same trade seldom meet together,
  even for merriment or diversion, but the
  conversation ends in a conspiracy against the
  public, or in some contrivance to raise prices.
• Sherman Act 1890
• Section 1 prohibits contracts, combinations and
  conspiracies in restraint of trade
• Section 2 makes illegal any attempt to
  monopolize a market
• contrast per se rule
• collusive agreements/price fixing
• rule of reason
• unreasonable conduct

9

• Clayton Act (1914)
• intended to prevent monopoly in its incipiency
• makes illegal practices that may substantially
  lessen competition or tend to create a monopoly
• Federal Trade Commission established in the same
  year
• However, application affected by rule of reason
• proof of intent
• the law does not make mere size an offence or
  the existence of unexerted power an offence - it
  does not compel competition nor require all that
  is possible.

10

• Robinson-Patman (1936)
• prohibits price discrimination that is intended
  to lessen competition
• intended to prevent aggressive price discounting
• The Alcoa case (1945) was also important
• 90 market share
• expanded capacity in advance of market expansion
• inferred anti-trust violation from structure and
  conduct without overt evidence
• More relaxed attitude in last two decades
• emergence of large firms merger waves
• importance of global competition

11
The New Industrial Organization

• Dissatisfaction with the structure-conduct-perform
  ance approach
• collect profit data on firms in an industry
• explain differences using information on size,
  organization, RD, financial leverage etc.
• but what is the direction of causation?
• The old IO has limited treatment of product
  differentiation
• representative firm, little strategic interaction
• New IO strategic decision-making (Hotelling)
• scheduling of blockbuster and Disney movies