COURSE OUTLINE: Fall 2014 ECON 305: Industrial Organization Prof. C. Green Course Objective: We study the behaviour of the firm within a variety of environments (or market structures). We examine the determinants of market structure and effects of structure on the behaviour and performance of firms, with particular reference to the pricing, output, product variety, promotion, and entry decisions of firms. Course Prerequisite: ECON 208 and 209; or MGMT 293 and ECON 295; or Econ 230D or Econ 250D Course Marks: There will be a mid-term exam, scheduled for Wednesday, October 15 (in class), for one-third (33.3 percent) of the marks; and a formal three-hour exam at the end of the term for two-thirds (66.7 percent) of the marks. The mid-term exam will cover parts 1-6 on the course outline. The final exam covers the whole course, but with an emphasis on parts 7– 10. Textbook: The text for the course is Dennis Carlton and Jeffrey Perloff, Modern Industrial Organization, Fourth Edition, (Pearson: Addison-Wesley, 2005). (CP in reading list: Available at McGill Bookstore) Course Reading List: Items marked with an * are the required readings. ® indicates item is on Reserve. Office: Leacock 534; Office Hours: Wednesday 2:00-3:00; Friday 1:30-3:00 McGill University values Academic Integrity. Therefore all students must understand the meaning and consequences of cheating, plagiarism and other academic offences under the code of student conduct and disciplinary procedures (see http://www.mcgill.ca/students/srr/academicrights/integrity for more information). In accord with McGill University’s Charter of Student Rights, students in this course have the right to submit in English or in French any written work that is to be graded. 1. INTRODUCTION: THE INDUSTRIAL ORGANIZATION FRAMEWORK *CP, Ch. 1. 2. FIRMS: THEORY AND ORGANIZATION * CP, Ch. 2, pp.12-28; and *CP, Ch. 12, pp. 395-403. S. Martin (2010) Industrial Organization in Context, Oxford University Press. Chapter 10. * H. Simon (1991) “Organizations and Markets”, Journal of Economic Perspectives, Spring, pp. 25-44. A. Alchian and H. Demsetz (1972) “Production, Information Costs, and Economic Organizations", American Economic Review, Dec. pp. 777-795 M. Jensen (1988) “Takeovers: Their Causes and Consequences”, Journal of Economic Perspectives, Winter, pp. 21-48. N. Bloom and J. Van Reenen (2010) “Why do Management Practices Differ Across Firms and Countries?”, Journal of Economic Perspectives, v. 24, Winter: 203-224. 3. THE FIRM: PRODUCTION TECHNOLOGY AND COSTS * CP, Ch 2 , pp.29-48 * C. Green (1990) Canadian Industrial Organization and Policy (CIOP), Third edition, McGraw-Hill Ryerson, Ch. 5 ® P. Thompson (2012) “The Relationship Between Unit Cost and Cumulative Quantity and the Evidence for Organizational Learning-by-Doing”, Journal of Economic perspectives v.26, Summer: 203-224. M. Melitz and D. Trefler (2012) “Gains from Trade when Firms Matter”, Journal of Economic Perspectives, v. 26. Spring: 91-118. P. Milgrom and J. Roberts, (1990) “The Economics of Modern Manufacturing: Technology, Strategy, Organization”, American Economic Review, v. 80 June: 511-528. M. Perelman, (2011) “Retospectives: X-Efficiency”, Journal of Economic Perspectives, v. 25, Fall: 211-222. 1 4. COMPETITION, ENTRY-EXIT, AND EFFICIENCY * CP, Ch. 3. W.G. Shepherd (1984), ““Contestability” vs Competition”, American Economic Review, September. pp. 572-587 5. MARKET POWER, DOMINANT FIRMS, AND PRICING STRATEGIES * CP, Ch. 4; and *CP Ch 15, pp 507-511; * CP, Ch. 9; and *CP Ch. 10, pp. 313-318. D. Ross (1986), “Learning to Dominate”, Journal of Industrial Economics, Vol. 34, No. 4, Jun, pp. 337-354. F.A. Wolak, (2003) “Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998-2000”, American Economic Review, v. 93, May: 425-430. 6. CARTELS AND OTHER AGREEMENTS AMONG FIRMS * CP, Ch. 5; and *CP Ch. 11, 379-386 Green, ClOP, Ch. 8. * Clarke, R. and J-F Houde (2013) “Collusion with Asymmetric Retailers: Evidence from a Gasoline Price-Fixing Case”, American Economic Journal: Microeconomics, v. 5, August: pp.97-123. Read pp. 97-106; 121-123. D. Genesove and W.P. Mullin, (2001) “Rules, Communication, and Collusion: Narrative Evidence from the Sugar Institute Case”, American Economic Review, June: 379-398. 7. OLIGOPOLY AND GAME THEORY * CP, Ch. 6; and *Green ClOP, Ch. 7 ®. 8. PRODUCT DIFFERENTIATION AND ADVERTISING *CP. Ch. 7; CP, Ch 13: pp.452-456; and *CP Ch 14, pp 471-489 R. Schmalensee, (1978) “Entry Deterrence in the Ready-to-Eat Cereal Industry”, Bell Jour. of Econ., v 9, Autumn: 305-327 W.J. Adams, (2006) “Markets: Beer in Germany and the U.S.”, Journal. Of Econ Perspectives, v.20, No.1, Winter: 189-206 9. STRATEGIES AND CONDUCT a. Entry Deterrence Strategies * CP Ch. 11. H. Demsetz, (1982) “Barriers to Entry”, American Economic Review, v. 72, March: 47-57 D. Besanko et al (2014), “The Economics of Predation: What Drives Pricing When There Is Learning-by-Doing?” American Economic Review, v. 104, March: 868-97 T. Dunne, et al.(1988) “Patterns of Firm Entry and Exit in U.S. Manufacturing Industries”, Rand Jour of Econ, Winter: 495-515. R. Gilbert, (1989) “The Role of Potential Competition in Industrial Organization”, Jour. of Econ. Perspectives, Summer: 107-127. A. Dixit, (1982) “Recent Developments in Oligopoly Theory”, American Economic Review, May: 12-17. B. Yamey,(1972) “Predatory Price Cutting; Notes and Comments”, Journal of Law and Economics, April: 129-142. * S. Salop and D.T. Scheffman, (1983) “Raising Rivals Costs”, American Economic Review, May: 267-271. b) Vertical Relationships: Integration and Restraints * CP Chs.10, pp.319-328; and *CP Ch 12, 415-437. R. S. Lee (2013) “Vertical Integration and Exclusivity in Platform and Two-Sided Markets”, American Economic Review, v. 103, December: 2960-3000 Read pp. 2960-2969 2 10. MARKET POWER, EFFICIENCY, AND PERFORMANCE: STATIC AND DYNAMIC CONSIDERATIONS * CP, Ch 8; and *CP Ch 16 pp. 560-567. D.S. Hay, G.S. Liu, (1997) “The Efficiency of Firms: What Difference Does Competition Make?” Econ Jour., May: 597-617. H. Demsetz (1973), “Industry Structure, Market Rivalry, and Public Policy”, Journal of Law and Economics, April, pp. 1-9. R. Levin et al. (1987), “Appropriating the Returns from industrial Research and Development”, Brookings Papers on Economic Activity, Special issue on Microeconomics, No. 3, pp. 783-832. * F.M. Scherer, (1992) “Schumpeter and Plausible Capitalism”, Journal of Economic Literature, Sept: 1416-1433. W. G. Shepherd (1982) “Causes of Increased Competition in the U.S. Economy 1939-1980”, Rev of Econ and Stat, Nov. 613626 R.R. Nelsen and S.G. Winter, (1978) “Forces Generating and Limiting the Growth of Concentration under Schumpeterian Competition”, Bell Journal of Economics, Autumn::524-543. S. Borenstein and G. Saloner (2001), “Economics and Electronic Commerce”, Jour of Econ Perspectives, Winter:3-12. 3