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EC 208 Industrial Economics 1: Market Structure

Course Syllabus

General Information
Lecturer: Robert Akerlof Lecture Times: Tuesday 12noon-1pm in PS1.28 and Wednesday 11am-12noon in L4 Office: S2.103 Office Hours: Wednesday 2-4pm and by appointment Email: R.Akerlof@warwick.ac.uk Teaching Assistant: Luciana Nicollier Office: S1.105 Office Hours: TBA Email: L.A.Nicollier@warwick.ac.uk Course Website: http://www2.warwick.ac.uk/fac/soc/economics/ug/modules/2nd/ec208/ Textbooks: Cabral, Luis (2000) Introduction to Industrial Organization, The MIT Press Carlton, Dennis and Jeffrey Perloff (2005) Modern Industrial Organization, Pearson, 4th ed

Assessment
Your assessed work for the course will be comprised of 2 problem sets, 1 essay of 1,200 words and a 1.5 hour final exam, sat in May/June. Problem sets will be handed out on Wednesdays during lectures in weeks 2 and 5 in term 1. They are due respectively by October 21 and November 11. Your essay will be due on December 12; topics will be handed out shortly. The weighting of assessed work towards your final mark will be:
Problem Sets: 10% (2 x 5%). Students may work in groups. Paper submission. Essay: 10%, electronic submission Final Exam: 80%

Lecture Outline and Reading List


The following outlines the structure of the course. Although we will attempt to keep to the plan, it is approximate and in particular some topics may take more or less time than indicated. The suggested readings contain material relevant to the topic of the lecture, but not exclusively so. You will have to identify the relevant passages and for those topics where you want a deeper understanding, you will need to find additional readings. Other material may be mentioned in the lectures. Broadly speaking, we will be covering the first two parts (plus some of part 3) of Carlton and Perloff, or in Cabral, parts 1-3, 5 and a bit of 4. The module EC231 Industrial Economics 1: Strategic Behaviour covers many of the remaining topics. Tutorials will begin in week 2 or week 3, depending on which group you are in- check notice board!

Lectures
Lectures 1&2: Introduction to Industrial Organization and Review of Basic Microeconomics Central questions: Review of demand, cost and basic microeconomics. The firm and its boundaries. The assumption of profit maximization. Readings: Cabral, chs. 1-3; Carlton and Perloff, chs. 1-2. Lectures 3&4: Market Structure: Monopoly, Perfect Competition, Monopolistic Competition The basic differences between competition and monopoly. The issues arising in monopoly, including topics such as dominant firms, natural monopoly, and relevant cost concepts. Monopolistic competition. Categorization of industries. Measuring market structure (introduction). Readings: Cabral, chs 5 and 6; Carlton and Perloff chs. 3, 4 and 7. Clarke, R., 1993 , Trends in concentration in UK Manufacturing 1980-9. In M. Casson and J. Creedy (Eds.), Industrial Concentration and Economic Inequality, Edward Elgar. Lectures 5&6: Game Theory: Basic Tools for Strategic Analysis Interdependent decision making. Game theory. What is a game? How is it described? How is it solved? Stage games and repeated games. Readings: Cabral, ch. 4; Carlton and Perloff, ch. 6. Lyons, B. and Y. Varoufakis, 1989, Game Theory, Oligopoly and Bargaining, in J.D. Hey (Ed.), Current Issues in Microeconomics, Macmillan. Vickers, J., 1985, Strategic Competition among the Few, Oxford Review of Economic Policy vol. 1(3). Reprinted in T. Jenkinson, 1996, Readings in Microeconomics, Oxford University Press. Gibbons, R., 1992, Game Theory for Applied Economists, Princeton University Press. Fudenberg, D. and J. Tirole, 1989, Noncooperative Game Theory for Industrial Organization in R. Schmalensee and R.D. Willig, eds., The Handbook of Industrial Organization, North-Holland. Lectures 7&8: Oligopoly Models I The Bertrand and Cournot models. Readings: Cabral, ch. 7; Carlton and Perloff, ch. 6. Vickers, J., 1985, Strategic Competition among the Few, Oxford Review of Economic Policy vol. 1(3). Reprinted in T. Jenkinson, 1996, Readings in Microeconomics, Oxford University Press. Friedman, J.W., 1983, Oligopoly Theory, Cambridge University Press. Shapiro, C., 1989, Theories of Oligopoly Behavior in R. Schmalensee and R.D. Willig, eds., The Handbook of Industrial Organization, North-Holland. Lectures 9&10: Oligopoly Models II The Stackleberg model. Experimental evidence on oligopoly models. Readings: Cabral, ch. 7; Carlton and Perloff, ch. 6. Vickers, J., 1985, Strategic Competition among the Few, Oxford Review of Economic Policy vol. 1(3). Reprinted in T. Jenkinson, 1996, Readings in Microeconomics, Oxford University Press. 2

Friedman, J.W., 1983, Oligopoly Theory, Cambridge University Press. Shapiro, C., 1989, Theories of Oligopoly Behavior in R. Schmalensee and R.D. Willig, eds., The Handbook of Industrial Organization, North-Holland. Bulow, J., J. Geanakoplos and P. Klemperer, 1985, "Multimarket Oligopoly: Strategic Substitutes and Complements", Journal of Political Economy vol. 93, pp. 488-511. Plott, C., 1982, Industrial Organization Theory and Experimental Economics Journal of Economic Literature, 20, pp. 1485-1527. Lectures 11&12: Cartels and Collusion Mechanisms which allow firms to coordinate their actions. Problems for cartels. Facilitating practices. Empirical evidence. Multimarket contact. Readings: Cabral, ch. 8; Carlton and Perloff, chs. 5 and 11. Rees, R., 1993, Tacit Collusion, Oxford Review of Economic Policy vol. 9(2). Reprinted in T. Jenkinson, 1996, Readings in Microeconomics, Oxford University Press. Rees, R., 1993, Collusive Equilibrium in the Great Salt Duopoly, Economic Journal 103, 883-848. Salop, S., 1986, Practices that (Credibly) Facilitate Oligopoly Coordination, in: J. Stiglitz and F. Mathewson, eds., New Developments in The Analysis of Market Structure (MIT Press, Cambridge, MA). Bernheim, D. and M.D. Whinston, 1990, Multimarket Contact and Collusive Behavior, Rand Journal of Economics, 21, pp. 1-26. Lectures 13&14: Product Differentiation Incentives for firms to differentiate their products. Horizontal product differentiation. Hotelling and Salops models. Vertical product differentiation. Hedonic demand. Switching costs and lock-in effects. Readings: Cabral, ch. 12; Carlton and Perloff, ch. 7. Lancaster, K., 1990, The Economics of Product Variety: A Survey, Marketing Science vol.9, pp. 189-211. Waterson, M., 1994, Models of Product Differentiation. In J. Cable (Ed.), Current Issues in Industrial Economics, MacMillan Press. Shapiro, C. and H. Varian, 1999, Information Rules, Harvard Business School Press, chapter 5. Lectures 15&16: Entry, Exit and Contestable Markets Free entry. Barriers to entry. Capacity precommitment - Dixits model. Contestability. Readings: Cabral chs. 14-15; Carlton and Perloff, chs. 3 and 11.
Dixit, A.K., 1982, "Recent Developments in Oligopoly Theory", American Economic Review, papers & proceedings vol. 72, pp. 12-17.

Fudenberg, D. and J. Tirole, 1987, "Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization", American Economic Review, papers & proceedings vol. 77, pp. 137-183. Ghemawat, P. and B Nalebuff, 1985, Exit, Rand Journal of Economics 16, pp. 184194. Shapiro, C., 1989, "Theories of Oligopoly Behavior", Ch. 6 in R. Schmalensee and R.D. Willig(Eds.), Handbook of Industrial Organization vol 1., pp. 329-414. 4

Vickers, J., 1985, Strategic Competition among the Few, Oxford Review of Economic Policy vol. 1(3). Reprinted in T. Jenkinson, 1996, Readings in Microeconomics, Oxford University Press.

Lectures 17&18: Studies of Structure and Profitability Testing oligopoly theory. Moving between theory and data. Examples. Cross sectional studies price concentration, cross-section studies, industry studies. Long run profitability. Readings: Cabral, ch. 9; Carlton and Perloff, chs. 8 and 17. Martin, S., 1993, Advanced Industrial Economics, Blackwell. Chapters 16 - 18. Haskel, J. and C. Martin, 1994, Capacity and Competition: Empirical Evidence on UK Panel Data, Journal of Industrial Economics 42, 23-44. Marin, P., 1995, Competition in European Aviation, Journal of Industrial Economics 43, 141-159. Sutton, J. Sunk costs and market structure, chs. 2 and 3. Winston, M. and Collins, S., 1992, Entry and Competitive Structure in the Deregulated Airline Markets Rand Journal of Economics, 23, 445-62. Lectures 19&20: Durable Goods The choice of durability by a monopolist and a competitive firm. Renting vs. selling. Resale markets Readings: Carlton and Perloff, ch. 15. Schmalensee, R., 1979, Market Structure, Durability, and Quality: A Selective Survey Economic Inquiry, 17, 177-96. Liebowitz, S.J., 1982 Durability, Market Structure, and New-Used Goods Models American Economic Review, 72, 816-24. Waldman, M., 2003, Durable Goods Theory for Real World Markets Journal of Economics Perspectives, 17, 131-54.

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