Industrial Organization

Week 1. Lecture 1. Introduction

Mikhail Drugov

New Economic School - Egor Gaidar Foundation

Summer School

27 June 2017

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Lecturers

I Mikhail Drugov mdrugov@nes.ru

I https://sites.google.com/site/mdrugov/
I Graduated from HSE (1999, 2001) and NES (2001)
I PhD from Toulouse (2006)
I Research interests: Contract Theory, Industrial Organization,
Organizational Economics, Corruption, Contests, Experiments
I Danil Fedorovykh dfed@hse.ru
I http://www.hse.ru/sta¤/df
I Graduated from HSE (2009, 2011)
I Research interests: microeconomics, industrial organization
and economics of informal markets
I Founder of http://iloveeconomics.ru/
I Expert in LATEX

Industrial Organization, Week 1, Lecture 1 2 / 14

About the course
I 10 lectures and 10 “seminars” each week
I Exams at the end of each week (Saturdays 01/07 and 08/07)
I Lectures are/will be available at
https://sites.google.com/site/mdrugov/io2017
I Textbooks:
I Paul Belle‡ame and Martin Peitz (2010, 2015) Industrial
Organization: Markets and Strategies, Cambridge University
Press
I Oz Shy (1995) Industrial Organization: Theory and
Applications, The MIT Press (also available in Russian)
I Jean Tirole (1988) The Theory of Industrial Organization, The
MIT Press (also available in Russian)
I Ran Spiegler (2011): Bounded Rationality and Industrial
Organization, Oxford University Press (the very last lecture)
I Course requirements
I Calculus (di¤erentiation)
I Game theory (Nash equilibrium, SPNE)
Industrial Organization, Week 1, Lecture 1 3 / 14
Plan of the course
Week 1

Introduction and overview

1. Introduction. History of Industrial Organization.
2. Overview of Industrial Organization.
Monopoly
3. Monopoly. Multiproduct monopoly.
4. Price discrimination.
5. Bundling and tying. Durable good monopoly.
Oligopoly
6. Oligopoly with homogeneous products. Capacity constraints.
7. Oligopoly with di¤erentiated products.
8. Location models.
Various topics
9. Entry. Investment in capacity. The zoo of Fudenberg and
Tirole (1984). Limit pricing.
10. Monopolistic competition.
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Plan of the course
Week 2

Information
1. Informative advertising. Persuasive advertising.
2. Disclosure. Quality Signalling. Warranties.
Competition policy issues
3. Horizontal mergers.
4. Collusion I. The basic model. Factors facilitating collusion.
Collusion at lower than monopoly level.
5. Collusion II. “Carrot-and-stick”strategies. Imperfect
information. Leniency. Screening.
6. Vertical relations. Double marginalization. Downstream Moral
Hazard. Chicago critique and its critique.
Various topics
7. Switching costs. Networks.
8. Innovation and R&D.
9. Intellectual property.
10. Behavioral Industrial Organization. Loss aversion. The market
for quacks.
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History of Industrial Organization
Before the 1930s

I Not a separate …eld

I No theoretical framework
I There was a theory of monopoly and Marshallian theory of
competitive markets
I Mostly, institutionalist industry studies
I Technical processes of production; size and location of plants;
ownership, marketing, labor conditions
I But not much about prices
I However, great interest and discussions about antitrust policy
from the end of XIX century

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History of Industrial Organization
Harvard Tradition (1930 - 1960; Joe Bain, Edward Mason)

I “Structure-Conduct-Performance” paradigm
I Structure (the number of sellers in the market, their degree of
product di¤erentiation, the cost structure, the degree of
vertical integration with suppliers, and so on) determines
I Conduct (which consists of price, research and development,
investment, advertising, and so forth) which yields
I Market performance (e¢ ciency, ratio of price to marginal cost,
product variety innovation rate, pro…ts, and distribution)
I Often rested on loose theories
I Emphasized empirical studies of industries
I Initially, book-length studies of single industries

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History of Industrial Organization
“Structure-Conduct-Performance” paradigm

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Industrial Organization, Week 1, Lecture 1 8 / 14

History of Industrial Organization
Harvard Tradition (1930 - 1960; Joe Bain, Edward Mason)

I Bain (1956): cross-section econometric analysis

I For example, it was generally found that certain measures of
conduct and performance were strongly linked with the
market’s structure
I A typical regression had the form Πi = f (CRi , BE , ...)
I At the level of an industry, pro…tability depended on the
concentration ratio (a measure meant to summarize how
non-competitive the industry is), barriers to entry (referred to
variables that measured the di¢ culty of entering the industry
(approximated by the minimum e¢ cient scale of entry, the
ratio of advertising to sales, and so on)), etc.

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History of Industrial Organization
Harvard Tradition (1930 - 1960; Joe Bain, Edward Mason)

I Argued that high concentration was bad for consumers

I Argued for a strict enforcement of the antitrust legislation
(successfully)
I In Brown Shoe (1962), the Supreme Court disallowed a merger
between two …rms that together would have had only 5% of
the national shoe market
I Main weakness: show essentially correlations, not causality

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History of Industrial Organization
Chicago School (1960 - 1980; Robert Bork, Aaron Director, George Stigler)

Casual observations of business behavior, colorful

characterizations (such as the term “barrier to entry”),
eclectic forays into sociology and psychology, descriptive
statistics, and veri…cation by plausibility took the place of
the careful de…nitions and parsimonious logical structure
of economic theory. The result was that industrial
organization regularly advanced propositions that
contradicted economic theory.

Posner (1979 U Penn Law Review)

I Industrial economists should use formal models
I It can be generally assumed that the model of perfect
competition approximates well the reality
I “E¢ ciency critique”
I E¢ cient …rms are pro…table and large. Thus, concentrated
industries
Industrial Organization, are pro…table
Week 1, Lecture 1 because there are e¢ cient 11 / 14
History of Industrial Organization
Chicago School (1960 - 1980; Robert Bork, Aaron Director, George Stigler)

I Emphasis on price theory (markets work)

I Distrust of government intervention
I “E¢ ciency critique”
I E¢ cient …rms are pro…table and large. Thus, concentrated
industries are pro…table because they are e¢ cient
I Market structure is endogenous
I Monopoly is much more often alleged than con…rmed; entry
(or just the threat of entry) is important
I When monopoly does exist, it is often transitory

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History of Industrial Organization
Game Theory (1980 - )

I Emphasis on strategic decision making

I Modeled mathematically using Nash equilibrium concept
I Produces a huge proliferation of models which are often very
intuitive theoretically
I However, it is di¢ cult to know which model is the right one
for a real world industry

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History of Industrial Organization
New Empirical I.O. (1990 - )

I Combines theory and econometrics in a serious way

I Sophisticated, computationally intense, complex empirical
models
I The vast majority of the studies are single industry in order to
deal better with product heterogeneity, institutional details,
really understand price and quantity information, etc.

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