ҮЙЛДВЭРЛЭЛИЙН ЗОХИОН БАЙГУУЛАЛТ – Магистрын хөтөлбөр


MASTER PROGRAMS
Fall Semester (PDF file: MA-IndOrg)
COURSE SYLLABUS
THEORY OF INDUSTRIAL ORGANIZATION
Program Master in International Business
Year 1-st year
Course status Elective
Workload 3 ECTS, 30 hours of classes
Prerequisites Introductory Microeconomics
Teaching methods Lectures, group work, presentations, case study, home and class
assignments
Course objectives
 To study the operation and performance of imperfectly competitive markets and the
behavior of firms in these markets
 To determine factors and strategies that provide firms with a competitive advantage, with
a special focus on identifying strategies which create monopoly rents and allow firms to
maintain them
Course content
Topic 1. Introduction to Industrial Organization
Description of Industrial Organization. Different approaches to studying Industrial Organization.
Characteristics of perfect competition. Market equilibrium and the zero profit condition.
Monopoly (market) power and downward sloping demand. Equilibrium and positive economic
profit. Efficiency comparisons of competition and monopoly using surplus concepts.
Measures of Market Structure. Concentration Curves and Ratios. Herfindahl Index.
Measurement Problems.
Measures of Market Power. Lerner Index. Empirical Measures of Monopoly-Induced Market
Distortions. Economies of size and scale. Fixed, sunk, avoidable, and variable costs. Basic
structure of multiproduct firms
Topic 2. Price Discrimination
Uniform versus non-uniform pricing. Feasibility of Price Discrimination. Third degree price
discrimination. Third degree price discrimination for differentiated products. First degree price
discrimination. Two-part tariffs and block pricing. Idea and prevalence of volume discounts.
Second degree price discrimination. Incentive compatible pricing schemes.
Topic 3. Product Differentiation and Product Quality
Vertical versus horizontal price differentiation. Spatial model of product differentiation
(Hotelling). Vertical Product Differentiation. Offering more than one product in a Vertically
Differentiated Market. Product tie-ins and commodity bundling. Commodity bundling as a way
to price discriminate. Complementary goods and network externalities. Damaged goods.
Topic 4. Oligopoly and Strategic Interaction
Simultaneous (normal) and sequential (extensive) form games. Dominant and dominated
strategies. Nash equilibrium as a solution concept. Finding Nash equilibrium. Best response
functions. Oligopoly models. The simple Cournot model. The Bertrand Model. Strategic
substitutes / complements. Simultaneous vs. Sequential Games. Stackelberg model. Credibility,
credible commitments.
Topic 5. Oligopoly: Entry Deterrence
Predatory conduct and credible threats. Limit pricing in incumbent/entrant (Stackelberg) models.
Predation in incumbent/entrant (Stackelberg) models. Extensive form games. Subgames in
extensive form games and subgame perfection. Capacity expansion as a form of credible
commitment. Predatory pricing. Role of contracts in impeding entry into a market. Public policy
towards predatory behavior.
Topic 6. Horizontal and Vertical Relations between Firms. Mergers
Introduction to Stackelberg model of mergers. Gains from vertical integration. Oligopolistic
vertical mergers. Conglomerate mergers.
Topic 7. Strategic Investment and Nonprice Competition
Types of innovations, market structure, and competition in R&D. The Schumpeterian hypothesis.
Competition via innovation. Costs and benefits of advertising. Empirical facts on advertising
(pricing) and quality. Advertising and monopoly power.
Plan of classes
Class 1.
Topic 1. Introduction to Industrial Organization
Key points:
 Description of Industrial Organization. Different approaches to
studying Industrial Organization.
 Characteristics of perfect competition. Market equilibrium and
the zero profit condition. Monopoly (market) power and
downward sloping demand. Equilibrium and positive economic
profit. Efficiency comparisons of competition and monopoly
using surplus concepts.
 Measures of Market Structure. Concentration Curves and
Ratios. Herfindahl Index. Measurement Problems.
 Measures of Market Power. Lerner Index. Empirical Measures
of Monopoly-Induced Market Distortions. Economies of size
and scale. Fixed, sunk, avoidable, and variable costs. Basic
structure of multiproduct firms
Learning outcomes:
 The Nature of Industrial Organization.
 The motivation for formal analysis of imperfect competition.
 Explain the characteristics of perfect competition
 Graphically show the profit of a monopoly firm using the
marginal revenue curve, the demand curve, the marginal cost
curve, and the average total cost curve.
 Explain the importance of firm size (production or sales
potential) relative to market demand as it relates to monopoly
power and market inefficiency.
 Explain the following measures of structure: concentration
ratios, Herfindahl-Hirschman index.
 Explain the difference between a structure measure like CR4
and a performance measure like efficiency, profitability, or
Pareto optimality.
 Explain the issues related to the definition of a market and how
this affects measures of concentration. The student will
understand that an appropriate definition for one type of
analysis may not be appropriate for another type of analysis and
how aggregation can both clarify and cloud issues of market
structure.
 Understand the differences between the neoclassical
(technological) view of the firm and other views related to
agency theory, transactions costs, incomplete contracts, and
residual control rights. The student will be able to discuss some
of the limitations of the neoclassical approach in explaining the
boundaries of the firm.
 Explain economies of size and natural monopoly and how
technology can affect industry structure.
 Present a reasoned argument on various non-cost determinants
of market structure. The student will be able to give examples
of some of these determinants.
Assignments for class 1:
 Reading: Pepall, ch. 1-4; Church, ch. 1, 2, 3.1, 12; Porter “The
Five Competitive Forces that Shape Strategy”
Topic 2. Price Discrimination
Class 2.
Key points:
 Uniform versus non-uniform pricing
 Feasibility of Price Discrimination
 Third degree price discrimination
 Third degree price discrimination for differentiated products
 First degree price discrimination
 Two-part tariffs and block pricing
 Idea and prevalence of volume discounts
 Second degree price discrimination
 Incentive compatible pricing schemes
Learning outcomes:
 Define and explain the differences between uniform pricing and
price discrimination.
 Explain the conditions that must exist for a firm to practice
price discrimination.
 Understand third degree price discrimination in the context of
differentiated products.
 Differentiate the three types of price discrimination.
 Show how second-degree price discrimination leads to volume
discounts and various ways to implement such discounts in a
way to maximize profits. The student will be able to analyze
block pricing schemes utilizing self-selection mechanisms.
Assignments for class 2:
 Reading: Pepall, ch. 5, 6; Church, ch. 5
 Exercises: problems 1, 2 (see problem set)
Topic 3. Product Differentiation and Product Quality
Topic 4. Oligopoly and Strategic Interaction
Class 3.
Key points:
 Vertical versus horizontal price differentiation
 Spatial model of product differentiation (Hotelling)
 Vertical Product Differentiation
 Offering more than one product in a Vertically Differentiated
Market
 Product tie-ins and commodity bundling
 Commodity bundling as a way to price discriminate
 Complementary goods and network externalities
Learning outcomes:
 Distinguish vertical from horizontal product differentiation.
 Interpret physical space and distance as distance in product
space in defining a spatial model of product differentiation.
 Explain the extension of the model with one shop
 Extend the analogy of price discrimination in geographic space
to price discrimination in product characteristics space.
 Distinguish commodity bundling (fixed proportions) from tie-in
sales (variable proportions).
 Distinguish pure and mixed bundling strategies and determine
the optimal bundling strategy given data on reservation prices
for different groups.
Assignments for class 3:
 Reading: Pepall, ch. 7-8; Church, ch. 6, 11
 Exercises: problems 3, 4 (see problem set)
Class 4.
Key points:
 Simultaneous (normal) and sequential (extensive) form games
 Dominant and dominated strategies
 Nash equilibrium as a solution concept
Topic 5. Oligopoly: Entry Deterrence
 Finding Nash equilibrium
 Best response functions
 Oligopoly models
 The simple Cournot model
 The Bertrand Model
 Strategic substitutes / complements
 Simultaneous vs. Sequential Games
 Stackelberg model
 Credibility, Credible commitments
Learning outcomes:
 The student will understand the ideas of strategic
interdependence and reasoning strategically and be able to
apply them to economic models of market behavior.
 The student will understand and be able to apply simple ideas
from game theory to economic models.
 The student will understand how to solve a simple Cournot
duopoly model.
 Understand the logic behind the Bertrand model of price
competition, the idea of discontinuous reaction functions, how
to solve a simple Bertrand duopoly model, and the fundamental
differences between Bertrand and Cournot models.
 Differentiate strategic substitutes and strategic complements.
 Explain the difference between the Nash equilibrium of a
simultaneous form game (Cournot) and an extensive form game
(Stackelberg).
 Gain an intuitive understanding of credibility, credible
commitments, and credible threats.
Assignments for class 4:
 Reading: Pepall, ch. 9-11; Church, ch. 7-9
 Exercises: problems 5, 6 (see problem set)
Class 5.
Key points:
 Predatory conduct and credible threats
 Limit pricing in incumbent/entrant (Stackelberg) models
 Predation in incumbent/entrant (Stackelberg) models
 Extensive form games
 Subgames in extensive form games and subgame perfection
 Capacity expansion as a form of credible commitment
 Predatory Pricing
 Role of contracts in impeding entry into a market
 Public Policy towards predatory behavior.
Learning outcomes:
 Define and give examples of predatory conduct.
 Compare the potential returns from predation and from merger
and analyze the incentives for particular types of strategies in
different markets.
 Utilize backward induction to solve extensive form games. The
student will be able to prune extensive form game trees as a
means for backward induction.
Topic 6. Horizontal and Vertical Relations. Mergers
Topic 7. Strategic Investment and Nonprice Competition
 Differentiate predatory conduct, predatory pricing, and limit
pricing.
Assignments for class 5:
 Reading: Pepall, ch. 12-13; Church, ch. 13, 14, 21
 Exercises: problems 7, 8 (see problem set)
Class 6.
Key points:
 Introduction to Stackelberg model of mergers
 Gains from vertical integration
 Oligopolistic vertical mergers
 Conglomerate mergers
Learning outcomes:
 Explain the reasons behind mergers.
 Differentiate horizontal, vertical, complementary, and
conglomerate mergers.
 Differentiate the conclusions of the alternative horizontal
merger models (Cournot and multiple leader/follower
Stackelberg) and relate them to the model assumptions.
 Apply the complementary goods model to the analysis of
vertical mergers.
 Solve problems involving oligopolistic vertical mergers.
 Relate scale and scope, transactions costs, proprietary
information, and agency problems to incentives for
conglomerate mergers.
Assignments for class 6:
 Reading: Pepall, ch. 16-17; Church, ch. 22-23
 Exercises: problems 9, 10 (see problem set)
Class 7.
Key points:
 Types of innovations, market structure, and competition in
R&D
 The Schumpeterian hypothesis
 Competition via innovation
 Costs and benefits of advertising
Learning outcomes:
 Discuss which types of industries are more likely to see
research joint ventures.
 Identify several ways in which advertising increases the demand
for a product.
Assignments for class 7:
 Reading: Pepall, ch. 20, 22; Church, ch. 17-18
Class 8.
Key points:
 Empirical facts on advertising (pricing) and quality
 Advertising and monopoly power.
Office hours for individual consultations:
Calendar plan of current and final evaluation
Class assignment October 1, 2.45 pm, room 408
Announcement of coursework
results October 8, 2.30 pm, room 408
Pre-exam consultation: October 13, 4:30 pm, room 408
Exam: October 15, 1 pm, room 408
Announcement of exam results: October 17, 4:30 pm, room 408
Evaluation system
 Form of current evaluation: class assignments
 Form of final evaluation: written exam
 Grading policy: final exam – 70%, class assignment – 30%.
Requited textbooks
The following two textbooks can be used interchangeably:
Pepall L., D. Richards, G. Norman. Industrial Organization: Contemporary Theory and
Empirical Applications. 4th ed. Blackwell Publishing. 2008. (available at GSOM library)
Church J., R. Ware. Industrial Organization: A Strategic Approach. McGraw-Hill. 2000.
Other required reading
Besanko D., D. Dranove, M. Shanley, S. Schaefer. Economics of Strategy. 4th ed. John Wiley &
Sons. 2007. (The book is used mostly to demonstrate strategic management applications of IO)
Porter M. The Five Competitive Forces that Shape Strategy. Harvard Business Review, January
2008.
Learning outcomes:
 Explain why the advertising to sales ratio for an industry is a
more useful gage of advertising intensity than the total dollars
spent on advertising.
 Explain how price as well as advertising expenditures may be a
signal of quality. The student will be able to explain the
empirical literature that shows minimal positive correlation
between price and quality.
Assignments for class 8:
 Reading: Pepall, ch. 20, 22; Church, ch. 17-18
 Igor Baranov, on Tuesdays and Thursdays at 4.30 PM or by appointment,
office 227 (A. Schultz Building)

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