Part I.

Getting started
Chapter 1. What is Markets and Strategies?

Slides
Industrial Organization: Markets and Strategies
Paul Belleflamme and Martin Peitz

Cambridge University Press 2009

Introduction to Part I

Markets
Play a central role in the allocation of goods
Affect production decisions
Goal of Markets and Strategies
Present the role of imperfectly competitive
markets for private and social decisions
Issues related to markets and strategies
Extremely large array!

Firms take thousands of strategic decisions

.... reacting to particular market conditions
.... and affecting the well-being of market participants.
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Introduction to Part I

Product
differentiation

Horizontal
merger

Pricing
strategies

Entry
deterrence

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Introduction to Part I

Organization of Part I
Chapter 1

Roadmap
Markets & strategies

Chapter 2

Players in markets: firms & consumers

Profit maximization, utility maximization
Market interaction

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Chapter 1 - Markets

Markets
Allow buyers and sellers to exchange goods and
services in return for a monetary payment.
Myriad of different varieties
Our main focus

A small number of sellers set price, quantity and other

variables strategically.
A large number of buyers react non-strategically to
supply conditions.
Usually, buyers = final consumers (B2C)
In some instances, buyers = other firms (B2B)

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Chapter 1 - Market power

Market power
How do markets operate?

Perfectly competitive paradigm: both sides of the

market are price-takers

OK for industries with small entry barriers and large number

of small firms.

Our focus: markets in which firms have market power

An incremental price increase does not lead to a loss of all of
the demand.
Applies to large firms, but also to small ones.

Market power and its sources are at the core of

this course.

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Chapter 1 - Number of firms

Number of firms in an industry

Natural oligopoly

Supply and demand conditions are such that only a

limited number of firms can enjoy positive profits.
Positive profits are not competed away.

Government-sponsored oligopolies

Goal of competition policy: avoid monopolization

But, governments sometimes restrict entry. Why?
Avoid socially wasteful duplication of certain investments

Regulated monopolies
Spectrum auctions for mobile telephony

Patent protection to foster innovation (see Part VII)

Creation of national champions

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Chapter 1 - Number of firms (2)

Case.
Case. Alcoas
Alcoas natural
natural monopoly
monopoly

1886:
1886: process
process of
of smelting
smelting aluminium
aluminium is
is patented
patented
AAsmall
small number
number of
of firms
firms use
use the
the patent
patent and
and start
start to
to
dominate
dominate the
the industry.
industry.
Most
Most successful:
successful: Alcoa
Alcoa (ALuminum
(ALuminum COmpany
COmpany of
of America)
America)
How?
How?

Large
Large economies
economies of
of scale
scale
Alcoa
Alcoa develops
develops markets
markets for
for its
its
growing
output
(intermediate
and
final
aluminium
products)
growing output (intermediate and final aluminium products)
Production
Production intensive
intensive in
in energy
energy
in
in 1893,
1893, Alcoa
Alcoa signs
signs in
in
advance
advance for
for hydroelectric
hydroelectric power
power produced
produced at
at Niagara
Niagara Falls
Falls
Production
Production intensive
intensive in
in bauxite
bauxite
Alcoa
Alcoa stakes
stakes out
out all
all the
the best
best
sources
sources of
of North
North American
American bauxite
bauxite for
for itself.
itself.
Efficiency
Efficiency gains
gains
Entry
Entry more
more difficult,
difficult, even
even after
after expiration
expiration of
of
patents
patents
Other
Other factors
factors
Public
Public policy,
policy,tariff
tariff protection,
protection, limited
limited antitrust
antitrust
check
check before
before 1914.
1914.

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Chapter 1 - Strategies

Strategies
Decision theory vs. Game theory

Decision theory isolated choices monopoly

Game theory strategic interaction oligopoly

Nash equilibrium

Prediction of market outcome when firms interact

strategically
Main concepts used in this course

Best-response function
Pure-, mixed-strategy Nash equilibrium
Subgame perfect Nash equilibrium
Bayesian Nash equilibrium
Perfect Bayesian Nash equilibrium

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Chapter 1 - Contents

Contents

Part I. Getting started

Chapter 1. What is Markets and Strategies?

Chapter 2. Firms, consumers and the market

Part II. Market power

Chapter 3. Static imperfect competition

Chapter 4. Dynamic aspects of imperfect competition

Part III. Sources of market power

Chapter 5. Product differentiation
Chapter 6. Advertising
Chapter 7. Consumer inertia

Part IV. Pricing and market segmentation

Chapter 8. Group and personalized pricing

Chapter 9. Menu pricing
Chapter 10. Intertemporal price discrimination
Chapter 11. Bundling and tying
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Chapter 1 - Contents (2)

Contents (contd)

Part V. Product quality and information

Chapter 12. Asymmetric information and signaling

Chapter 13. Marketing tools for experience goods

Part VI. Theory of competition policy

Chapter 14. Cartels and collusion

Chapter 15. Horizontal mergers
Chapter 16. Strategic incumbents
Chapter 17. Vertically related markets, vertical restraints and
mergers

Part VII. R&D and intellectual property

Chapter 18. Innovation and R&D
Chapter 19. Intellectual property

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Chapter 1. What is Markets and Strategies

Contents (contd)

Part VIII. Networks, standards and systems

Chapter 20. Markets with network goods
Chapter 21. Strategies for network goods

Part IX. Market intermediation

Chapter 22. Markets with intermediated goods

Chapter 23. Information and reputation in intermediated product
markets

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