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

Industrial Organization: contemporary theory and practice (3 rd edition). Lynne Pepall Dan Richards George Norman. 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

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

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  1. Industrial Organization: contemporary theory and practice (3rd edition) Lynne Pepall Dan Richards George Norman Industrial Organization: Chapter 1

  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 Industrial Organization: Chapter 1

  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 Industrial Organization: Chapter 1

  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? Industrial Organization: Chapter 1

  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) Industrial Organization: Chapter 1

  6. Do not say much about the internal organization of firms • vertical organization is discussed • internal contracts are not Industrial Organization: Chapter 1

  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.” Industrial Organization: Chapter 1

  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 Industrial Organization: Chapter 1

  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.” Industrial Organization: Chapter 1

  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 Industrial Organization: Chapter 1

  11. The New Industrial Organization • Dissatisfaction with the structure-conduct-performance approach • collect profit data on firms in an industry • explain differences using information on size, organization, R&D, 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 Industrial Organization: Chapter 1

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