Industrial Economics

Industrial Economics I

Course Description

To give students basic knowledge and skills to continue with advanced studies in industrial economics and management. The objective of the course is therefore to familiarize the student with business management, and provide skills in calculation, accounting, company analysis, and business communication.

Prerequisites
Basic knowledge of mathematics for economists.
Basic knowledge of microeconomics.
Standard microeconomic concepts can be found in: Varian, H., Intermediate Microeconomics. A Modern Approach. Ninth edition, WW Norton & Co., 2014.

Specific educational objectives
The course provides an in-depth discussion of key industrial economics concepts ranging from the foundations of market structure to theories of strategic interaction. Central theoretical concepts of modern industrial economics will be discussed and applied. Students will acquire

  1. a working-knowledge of the formal concepts and techniques such that important branches of the contemporary economics literature become accessible;
  2. the logical fundamentals and mathematical competences required to foresee applications to a variety of research areas.

The main educational objective is the acquisition of the basic knowledge and competences allowing students to analyze and discuss the theoretical mechanisms formalizing the relationships existing across firms and within industries.

List of topics covered:

  1. a working-knowledge of the formal concepts and techniques such that important branches of the contemporary economics literature become accessible;
  2. the logical fundamentals and mathematical competences required to foresee applications to a variety of research areas.

The main educational objective is the acquisition of the basic knowledge and competences allowing students to analyze and discuss the theoretical mechanisms formalizing the relationships existing across firms and within industries.
List of topics covered:

  • Fundamentals of microeconomics
  • Firms, competition and efficiency
  • Market failures and regulation
  • Price discrimination
  • Games and Strategies
  • Oligopoly, collusion and price wars
  • Entry and Market Structure
  • Horizontal Mergers
  • Market Foreclosure
  • Vertical Relations
  • Product differentiation
  • Innovation and Networks

Teaching Format

• Students are advised to read the literature indicated in the description of the topics being covered as preparation for a session.
• In particular, it will prove useful to try to anticipate those instances where it may be difficult to follow the presentation — this is not an uncommon experience when exposed to theoretical literature.
• Making a joint effort to overcome these difficulties is the main objective of the lectures, where key concepts from the literature are presented and discussed.
• • Special emphasis will be given to a thorough assessment of conceptual aspects and their potential applications.

Learning outcomes Knowledge and understanding:
Knowledge and understanding of the basic principles of market competition and price theory as well as the role played by distortions and market failures.

Applying knowledge and understanding:
Developing the ability to formalize economic environments building on the central theoretical concepts of modern industrial economic theory. In particular, students will develop the ability to:
• perform microeconomic analyses of cost structures and their role and importance in firm decisions;
• compare critically different theories of the firm;
• analyze the economic behaviour of firms through game theory.
• use the information available to understand the operative implications of competition and industrial policy theories.

Making judgements:
Ability to assess economic situations – particularly those determining the relationships among firms within an industry and the strategies that each firm can adopt –, relate them to concrete problems and provide policy recommendations.
Communication skills:
Capacity to present methodology and theory in a consistent way so as to engage in thorough discussions of key formal industrial economic concepts ranging from differences among market structures to theories of strategic interaction.

Learning skills:
Developing the learning skills required to continue studying at an advanced level after understanding the relationships existing between a formal concept and its related economic intuition.
Assessment Grading will be based on a final exam requiring students to solve both exercises and open questions so as to evaluate the theoretical and practical knowledge acquired throughout the course.
Evaluation criteria and criteria for awarding marks Clarity of answers and problem solving capacity.
Required readings Cabral, L.M.B., Introduction to Industrial Organization. Second edition, MIT Press, 2017.
Supplementary readings Industrial Organization

  • Belleflamme, P., Peitz, M., Industrial Organization.
    Markets and Strategies. Second edition, Cambridge
    University Press, 2015.
    -Tirole, J., The Theory of Industrial Organization. MIT Press, 1988.

Microeconomic Theory
-Varian, H., Microeconomic Analysis, Third Edition, WW Norton & Co., 1992.

  • Kreps, D., A Course in Microeconomic Theory.
    Princeton University Press, 1990.

Game Theory
-Osborne. M., An Introduction to Game Theory, First
Edition, Oxford University Press, 2003.
-Binmore, K., Fun and Games: A Text on Game
Theory, D C Heath & Co., 1991.

Industrial Economics II

Course Themes

  1. What determines the strength of price competition? We will among other things discuss the importance of market concentration, product differentiation and productivity differences between firms.
  2. How can we empirically measure the strength of price competition? We will discuss estimation of demand systems as well as oligopoly and entry models.

Outline

MARKET POWER

  1. Market Power (1-6 hmw)
  2. Oligopoly with Product Differentiation
  3. Product Choice
  4. Market Concentration & Entry

ESTIMATING MARKET POWER

  1. Identification of Oligopoly
  2. Identification of Entry
  3. Oligopoly
  4. Measuring market power
  5. Identification of Oligopoly
  6. Identification of Entry

COMPETITION POLICY

  1. Abuse of dominance
  2. Cartels (hmw)
  3. Mergers (hmw)
  4. Cartels
  5. Mergers
  6. Cartel Detection
  7. Identification of Differentiated Demand
  8. Merger Simulation

Course Themes

The course is concerned :

  1. What determines the strength of price competition? We will among other things discuss the importance of market concentration, product differentiation and productivity differences between firms.
  2. How can we empirically measure the strength of price competition? We will discuss estimation of demand systems as well as oligopoly and entry models.
  3. The course also introduces the basic elements of competition policy,
    including empirical techniques used by the parties in competition cases.

Problem Sets

The problem sets may include more exercises than we have time to discuss in class. The questions marked by * will be given priority. But there will also be time for you to ask questions about the other exercises.

You are very much encouraged to collaborate in groups, to compare and discuss your solutions to both the problem sets and the quizzes that you are working on. But this is up to you to decide.

The problem sets will not be graded, but one question on the exam will be
identical to a question (not necessarily marked with *) from the problem sets.

It is very important that you solve the problem sets before you come to class. Otherwise the whole point with this form of teaching is lost. The goal is to exercise your analytical skills, not your ability to replicate the solutions offered. Think of class only as an opportunity to verify that your own solutions are correct.

It is your analytical skills that will be tested on the exam.

Competition policy cases

We will use two meetings to discuss competition policy cases. The procedure is
as follows:

  1. Form groups. You should ideally work in the same groups as you worked
    with during the empirical labs.
  2. Identifying an interesting merger or cartel case.
    The different groups should ideally read different cases.
  3. Read the case. Reflect on the questions below.
  4. Prepare a short report (maximum 10 normally spaced pages).
  5. Present the report in class. Prepare a presentation of about 30 minutes. You may use power point presentations if you wish.

Choice of case:

The most spectacular cases are of course the ones where the competition authority or court either finds that the firms where guilty of a cartel agreement or that the competition authority or court prohibits an anticompetitive merger.

To identify an interesting case you can browse the Internet. To find the decision go to http://ec.europa.eu/competition/elojade/isef/
Questions:

The questions you should focus on include the following:

  1. What is the issue in legal and economic terms?
  2. What decision was taken?
  3. How did the Commission or the Court reach its decision?
    a. What where the key aspects?
    b. How where these aspects analyzed?
    c. What information about the market and the firms was important
    for the decision?
    d. Is there any use of economic theory or evidence in the decision?
    e. What aspects talked in favor of the decision and what aspects
    talked in the opposite direction?
  4. Was it a good decision?
    a. Was it a good decision from an economic welfare point of view?
    b. Did the Commission or the Court have access to all the important
    information?
    c. Did the Commission or the Court use good economic reasoning?
    d. Was there any public debate following the decision?
    e. What is your view?

Examination

Note that the students’ presentations of cases constitute 15% of the exam.

Also note that one question on the first exam will be identical to a question from
the problem sets.

Literature

Required Reading
• Bresnahan, Timothy and Peter Reiss (1991) “Entry and Competition in Concentrated Markets,” Journal of Political Economy, pp. 977- 1009.

• Genesove, D. and W. P. Mullin, (1998) “Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914.” RAND Journal of Economics 29, 355-377.

Required reading

• Your choice of competition law case.

Reference Literature

• Belleflamme, P., & Peitz, M. (2015). Industrial organization: markets and
strategies. Cambridge University Press.

• Cabral, Luis M. B. (2000) ‘Introduction to Industrial Organization’, Massachusetts Institute of Technology, Cambridge Massachusetts.

• Davis, P., & Garcés, E. (2009). Quantitative techniques for competition and
antitrust analysis. Princeton University Press.

• Pepall, Lynne, Dan Richards and George Norman (2008) “Industrial Organization: Contemporary Theory and Empirical Applications.” Blackwell Publishing, Oxford, UK.

• Tirole, Jean (1989) “The Theory of Industrial Organization.” MIT Press, Cambridge, Massachusetts.