Economics 452: Industrial Organization

Prof. Charles Moul



The goal of this class is for you to understand the five aspects of market power as a market failure that we discussed on the first day of class. Namely,
    1) How is market power created or established?
    2) How is market power exploited?
    3) How is market power maintained?
    4) What are the effects of market power?
    5) What are the remedies for market power?

Classroom: Class meets on Mondays and Wednesdays from 1:00 to 2:30 in Eliot 102. I will hold office hours (McMillan 248) from 10:00-12:00 Tuesdays, 2:30-4:30 Wednesdays, and by appointment. I can also be reached by email at moul@artsci.wustl.edu.

Teaching Assistant: Aleks Yankelevich (McMillan 331), office hours 2:30-4:30 Mondays and by appointment (anyankel@artsci.wustl.edu).

Text: Industrial Organization: Contemporary Theory and Practice (3rd edition) by Pepall, Richards, and Norman (though you can get by pretty well with the 2nd edition)
Newspaper: The Wall Street Journal (subscribing gets the print and web versions, subscribe online here ... student rate available)

(All downloadable documents require Adobe Acrobat Reader. Click here to download the latest version.)

Syllabus
Click here for the class syllabus (requirements and general outline for the class).

Competitive Strategy Game
    Teams
    Rules
    Market Profiles (Mkt C growth rate is 40%, not 20% as listed).
Up-to-date public information on each game: Game     
* Combining investment decisions and immediate profit-maximization can be difficult (witness all of history's speculative binges). You can find an extra memo for understanding costs in the game here.

Prior Years' Games
    2003
        Fundamentals (Costs and Growth rates)
        Revenues by market (A, B, C, D)
        Outcomes
     2004
       Everything - Cost and growth rates, weekly summaries, outcomes
     2005 
         Spreadsheet with both games (and some cross-game comparisons)
     2006
         Spreadsheet with both games (and some cross-game comparisons)
     2007
         Spreadsheet with both games (and some cross-game comparison)

Homeworks
    Homework 1 , Answers
    Homework 2 , Answers
    Homework 3 , Answers
    Homework 4 , Answers
    Homework 5 , Answers

Exams
Old Midterms (It should go without saying, but I suggest taking the exam before you consider the answers)
    Spring 2003: Exam, Answers ... median score: 54, range: 16 - 97
    Spring 2004: Exam, Answers ... median score: 56, range: 17 - 76
    Spring 2005: Exam, Answers ... median score: 53, range: 16 - 77
    Spring 2006: Exam, Answers ... median score: 63, range: 35 - 100
    Spring 2007: Exam, Answers ... median score: 35, range: 13 - 82  (oops on my part)
    Spring 2008: Exam, Answers, Grade mapping

Old final exams
    Spring 2003: Exam, Answers ... median score: 64, range: 42 - 94
    Spring 2004: Exam, Answers ... median score: 80, range: 54 - 98
    Spring 2005: Exam, Answers ... median score: 50, range:   8 - 79
    Spring 2006: Exam, Answers ... median score: 59, range: 18 - 80
    Spring 2007: Exam, Answers ... median score: 60, range: 23 -  83

Exam week office hours
    To minimize overlap between you all and my IntroMicro students (who will also have a final exam on 4/23), I ask that you come to the following irregularly scheduled office hours instead of my regular hours:
       4/21: 2:30-4:30
       4/22: 2-4
Aleks' regular hours will still apply.

Reading assignments (Note that it is helpful to complete readings before class).
    Unless otherwise specified, assignments refer to the textbook's 3rd edition. Parenthetical readings refer to the 2nd edition.  
    
    1/14    Introduction (USA Today article on Starbucks)
    1/16    Competitive Strategy Game -  read rules & market profiles
    1/23    History - read Ch. 1 (Ch. 1.3), JEP articles (Crandall & Winston, Baker, letters)
    1/28    Theory of the Firm, Agency Theory
    1/30    More Agency, Cost functions - read Ch. 3, 4.1 (Ch. 2.1, pp 53-62)
    2/4      Scale & Scope - finish Ch. 4 (Ch. 2.2-2.5)  
    2/6      Competition and Monopoly - Ch. 2 (Ch. 1.1-1.3)
    2/11     Portfolios and Differentiation
    2/13     Price Discrimination - Ch. 5 & 6 (Ch. 3)
    2/18     Monopoly Strategy and Monopolistic Competition - Ch. 7 & 8  (Ch. 4)
    2/20     Games & Cournot - Ch. 9 (Ch. 5)
    2/25     Bertrand & Stackelberg - Ch. 10, 11 (rest of Ch. 5)
    2/27     Collusion & Cartels - Ch. 14, 15 (Ch. 7)
    3/3       Review, Q&A
    3/5       Midterm Exam
    3/17     Exam handback, Predatory conduct
    3/19     Limit pricing - Ch. 12 (Ch. 6)
    3/24     Predatory pricing - Ch. 13, DoJ's complaint against AMR (linked below)
    3/26     Horizontal mergers - Ch. 16 (Ch. 8)
    3/31     Vertical mergers & restraints - Ch. 17, 18 (Ch. 9)
    4/2       Information & Advertising - Ch. 20 (10)
    4/7       Advertising II -Ch. 21
    4/9       Innovation and R&D - Ch. 22, 23 (11)
    4/14     Energy Markets (BBW table)
    4/16     Microsoft - Ch. 24 (12)
    4/21     Review/CSG wrap-up
    4/23     Final Exam

Predatory Pricing Additional Reading
American Airlines Monopolization Case
U.S. v. AMR, filed May 13, 1999 [www.usdoj.gov/atr] http://www.usdoj.gov/atr/cases/f2400/2438.htm

Consider the following questions as you read the complaint:
   1.To what behavior by American Airlines does the Department of Justice object?  What is DoJ's interpretation of this behavior?
   2.Is the airline industry characterized by conditions that might be conducive to predatory behavior?
   3.What alternative (non-predatory) explanations could you offer for American's behavior?
   4.What standard would you use to analyze whether American's behavior was predatory, and how would you apply it?

Missed Supreme Court ruling
On February 20, 2007, the Supreme Court issued a unanimous ruling that predatory bidding cases (a monopsony counterpart to predatory pricing) should be handled in an analogous fashion to the standard established in Brooke Group. The summary (syllabus) and opinion are both quite clearly written and on point for the material we have covered in class (link here).


Course Essay assignment here
Instructions accompany the assigned topic. The essay must be turned in no later than Monday May 5.

Last updated: April 21, 2008