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Industrial Organization : Theory and Practice

ISBN: 9780321376107 | 0321376102
Edition: 3rd
Format: Paperback
Publisher: Prentice Hall
Pub. Date: 7/25/2006

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SummaryTable of ContentsAuthor Biography
Written solely for the undergraduate audience, this streamlined Third Edition of Industrial Organization: Theory and Practicewhich features early coverage of Antitrustpunctuates its modern introduction to industrial organization with relevant empirical data and case studies to show students how to apply theoretical tools.
Prefacexix
PART I THE BASICS OF INDUSTRIAL ORGANIZATION
Introduction
1(16)
Two Approaches t... MORE
3(4)
The Structure-Conduct-Performance (SCP) Approach
3(3)
The Chicago School Approach
6(1)
Static versus Dynamic Models
7(1)
Theory and Empiricism
7(1)
Government and Industrial Organization
8(4)
The Content of the Antitrust Laws
8(3)
Enforcement Procedures
11(1)
The Global Economy and Industrial Organization
12(1)
General Approach of This Book
13(4)
Summary
14(3)
The Firm and Its Costs
17(34)
The Neoclassical Firm
17(1)
The Theory of the Firm
18(3)
A Firm's Boundaries
18(3)
The Structure of Modern Firms
21(10)
Separation of Ownership and Control
22(1)
Managerial Objectives
23(1)
Application 2.1 Executive Compensation: Pay for Performance?
23(2)
Application 2.2 X-Inefficiency Goes Extreme: Putting Masseuses, Christmas Trees, Renoirs, and Monets on the Company Payroll
25(1)
Feasibility of Profit Maximization
26(1)
Application 2.3 How Do Firms Use Rule-of-Thumb Pricing?
26(2)
Constraints on Managers
28(1)
Application 2.4 Stockholder Revolt at the Happiest Place on Earth: The Disney Stockholders versus Michael Eisner
28(3)
The Profit-Maximizing Output Level
31(1)
Cost Concepts: Single-Product Firms
32(10)
Accounting Costs Versus Economic Costs
32(1)
Short-Run Costs of Production
33(1)
Application 2.5 When Do Sunk Costs Matter to a Firm?
33(4)
Long-Run Costs of Production and Economies of Scale
37(2)
Application 2.6 A Measure of Economies of Scale
39(3)
Cost Concepts: Multiproduct Firms
42(9)
Application 2.7 A Measure of Economies of Scope
42(1)
Application 2.8 Are There Economies of Scope in Institutions of Higher Education?
43(2)
Summary
45(6)
Competition and Monopoly
51(37)
The Economics of Perfect Competition
51(8)
The Assumptions of Perfect Competition
52(2)
The Firm's Supply Curve
54(2)
Application 3.1 Short-Run Losses in the Airline Industry
56(1)
The Market Supply Curve and Equilibrium
57(1)
Properties of Competitive Equilibrium
58(1)
Introduction to Welfare Economics
59(3)
Application 3.2 Consumer and Producer Surplus and the Basic Theory of the Gains from Trade
59(3)
The Economics of Monopoly
62(3)
The Relationship Between Marginal Revenue and Price
62(2)
Elasticities, the Degree of Market Power, and the Lerner Index
64(1)
Welfare Comparison
65(6)
Measurement of the Costs of Market Power
67(1)
Application 3.3 Monopoly Rent-Seeking in the Pharmaceutical Industry
68(2)
Cautions
70(1)
Present Value and Discounting
71(2)
Antitrust Policy Toward Monopolization
73(15)
Early Cases
74(1)
Application 3.4 American Tobacco's ``Attempt to Monopolize''
74(2)
The Alcoa Era
76(1)
Recent Trends in Section 2 Cases
77(4)
Summary
81(7)
Market Structure
88(55)
Concentration in Individual Markets
89(7)
Structure-Based Measures
89(1)
Application 4.1 Aggregate Concentration
90(4)
Definition of the Relevant Market
94(2)
Entry and Exit
96(17)
Patterns of Entry and Exit
96(1)
Entry
97(1)
Static or Structural Barriers to Entry
98(2)
Application 4.2 How Do Economists Estimate Economies of Scale?
100(9)
Application 4.3 What Does the Evidence Say About Barriers to Entry?
109(1)
Incentives to Enter
110(1)
Exit
111(1)
The Interaction of Entry and Exit
112(1)
Mergers
113(30)
Merger History
114(2)
Motives for Merger
116(3)
Application 4.4 Can Pixar Save Disney?
119(1)
The Effects of Mergers on Competition and Welfare
120(3)
Empirical Evidence on the Effects of Mergers
123(2)
Public Policy Toward Mergers
125(7)
Merger Guidelines and the Hart-Scott-Rodino Act
132(3)
Summary
135(8)
Monopoly Practices
143(18)
Dominant-Firm Price Leadership Model
143(7)
Sources of Dominance
144(1)
Pricing by a Dominant Firm
144(5)
Application 5.1 Banks and Credit Unions: Dominant Firms and Fringe Suppliers?
149(1)
Empirical Evidence of the Decline of Dominant-Firm Price Leaders
149(1)
Contestable Markets: A Check on Market Power?
150(3)
Network Economics
153(8)
Complementarity, Compatibility, and Standards
153(1)
Externalities
154(1)
Switching Costs and Lock-In
155(1)
Significant Economies of Scale
155(1)
Summary of Network Effects
155(1)
Application 5.2 Microsoft and Network Effects
156(1)
Summary
157(4)
Market Power and Performance: The Empirical Evidence
161(46)
Structure-Conduct-Performance
162(1)
Statistical Tools Used to Test the SCP Paradigm
163(4)
Exogenous and Endogenous Variables
166(1)
Measurement Issues
167(9)
Measures of Performance
168(3)
Application 6.1 Does the Method of Calculating Profit Rates Matter?
171(3)
Correlations Among Measures of Performance
174(1)
Summary of Measures of Profitability
175(1)
Measures of Market Structure
176(1)
Measures of Concentration
176(1)
Barriers to Entry
176(1)
Other Variables
177(1)
Early Structure-Conduct-Performance Studies
177(1)
Econometric Studies
178(3)
Concentration and Profitability: Evidence From Industry-Level Studies
179(1)
Summary of Industry-Level Results
180(1)
Effects of Other Elements of Market Power on Profits
181(1)
Conceptual Problems with SCP Studies
182(5)
Collusion Versus Efficiency
182(2)
Assumption of Linearity
184(1)
Variations Over Time
185(2)
Endogeneity Problem
187(1)
Prices and Concentration
187(1)
An Alternative Approach: Sunk Costs and Market Concentration
188(7)
Markets with Exogenous Sunk Costs
189(1)
Markets with Endogenous Sunk Costs
189(2)
Sutton's Empirical Tests
191(2)
Application 6.2 Applying Sutton's Theory in the Supermarket Industry
193(2)
The New Empirical Industrial Organization
195(12)
Application 6.3 Price-Cost Margins in the RTE Cereal Industry
197(1)
Summary
198(9)
PART II MODERN INDUSTRIAL ORGANIZATION: GAME THEORY AND STRATEGIC BEHAVIOR
Game Theory: A Framework for Understanding Oligopolistic Behavior
207(23)
What Is Game Theory?
207(1)
Simple Zero-Sum Games
208(2)
Application 7.1 University Rankings and Merit-Based Financial Aid as a Zero-Sum Game
210(1)
The Information Structure of Games
210(1)
Prisoner's Dilemma Games
211(3)
Application 7.2 A Prisoner's Dilemma---Doctors and HMOs
212(2)
Repeated Games
214(1)
Games of Mixed Strategies
215(3)
Sequential Games
218(12)
Credible Versus Noncredible Threats and Subgame Perfect Nash Equilibria
219(2)
Application 7.3 Dr. Strangelove and Credible Threats Gone Wrong
221(2)
Summary
223(7)
The Development of Oligopoly Theory
230(36)
Models Based on Quantity Determination
230(21)
The Cournot Model
230(6)
The Cournot-Nash Equilibrium
236(2)
Cournot-Nash Model With More Than Two Firms
238(2)
Application 8.1 Empirical Evidence of Cournot-Nash Behavior---Experimental Games with Varying Numbers of Players
240(2)
Application 8.2 The Paradox of Mergers in a Cournot-Nash Market
242(1)
Application 8.3 Examples of Cournot-Nash Pricing in Real Markets
242(1)
Using the Cournot-Nash Model in the Context of International Trade
243(5)
Application 8.4 The Effectiveness of Industrial Policy: UK Subsidies and Tariffs
248(2)
Application 8.5 The Effectiveness of Industrial Policy: The Commercial Aircraft Industry
250(1)
The Stackelberg Model
251(5)
Firms With Identical Costs and Demand
251(2)
The Stackelberg Model: Firms with Different Costs
253(2)
Application 8.6 Empirical Examples of Stackelberg Equilibrium
255(1)
The Bertrand Model
256(10)
Application 8.7 Bertrand Pricing in the Airline Industry
260(1)
Application 8.8 Bounded Rationality, Sluggish Consumers, Internet Pricing, and the Failure to Achieve a Bertrand Equilibrium
260(2)
Summary
262(4)
Collusion: The Great Prisoner's Dilemma
266(37)
The Prisoner's Dilemma Revisited
266(8)
Application 9.1 Tit-for-Tat in Baseball
268(5)
Application 9.2 A Real-World Example of ``Nice'' Behavior in Response to Random or ``Accidental'' Defections Automobiles
273(1)
Another Strategy for Maintaining Effective Collusion: Trigger Price Strategies
274(1)
Collusive Agreements as Viewed by One Firm in a Cartel
275(7)
Factors Affecting the Ease or Difficulty of Effective Collusion
282(7)
The Existence of Market Power
283(1)
The Costs of Reaching And Maintaining An Agreement
284(3)
Application 9.3 Factors Facilitating Global Cartels: Evidence from Lysine, Citric Acid, and Vitamins A and E
287(2)
Antitrust Policy Toward Collusion
289(14)
Public Policy Toward Direct Price-Fixing Agreements
291(1)
Price-Exchange Agreements
292(1)
Oligopolistic Behavior---Conscious Parallelism
293(2)
Trade Associations
295(1)
Nonprofit Organizations: Cases Involving Colleges and Universities
296(2)
Summary
298(5)
Cartels in Action
303(32)
Attempted Methods of Achieving Effective Collusion
303(22)
Dominant-Firm Price Leader and Benefactor
303(3)
Price Leadership
306(4)
Application 10.1 A Sweet Case of Price Leadership: Dole and Del Monte in the Canned Pineapple Industry
310(1)
Most Favored Customer Clauses and ``Low-Price'' Guarantees
311(2)
Application 10.2 Most Favored Customer Clauses for Medicaid, But What About Everyone Else?
313(2)
Basing Point Pricing Systems
315(2)
Trade and Professional Associations
317(2)
Application 10.3 ``Something Is Rotten in the State of Denmark'': The Danish Government Promotes Tacit Price Fixing
319(2)
Schemes to Divide Markets
321(2)
Patent Cartels
323(2)
How Successful Are the Solutions?
325(10)
Excess Capacity Problems
325(1)
Encroachment of Substitute Products
326(1)
More Effective Antitrust Strategies: The Department Of Justice Corporate Leniency Program
326(3)
Summary
329(6)
Oligopoly Behavior: Entry and Pricing to Deter Entry
335(37)
Limit Pricing
335(16)
Limit Pricing with a Cost Advantage for the Monopolist Firm
335(3)
Limit Pricing in the Absence of a Cost Advantage for the Monopolist Firm
338(1)
The Critique of Game Theorists
339(5)
Limit Pricing with Asymmetric Information
344(3)
Empirical Evidence of Limit Pricing
347(3)
Application 11.1 Limit Pricing in the Antihistamine Market
350(1)
Predatory Pricing
351(21)
Predatory Pricing with Perfect, Certain, Complete, and Symmetric Information
352(1)
Predatory Pricing With Imperfect, Certain, Incomplete, And Asymmetric Information
353(1)
The Kreps And Wilson Predatory Pricing Game
354(1)
Empirical Evidence: Predatory Pricing and Building a Tough Reputation
355(3)
Application 11.2 Does Wal-Mart Use Predatory Pricing?
358(1)
Application 11.3 Don't Mess with Bill: Netscape versus Microsoft in the Internet Browser Market
359(2)
Summary
361(6)
Appendix: Details of the Kreps and Wilson Predatory Pricing Model
367(5)
Oligopoly Behavior: Entry and Nonpricing Strategies to Deter Entry
372(44)
Excess Capacity
372(8)
Investing in Research and Development to Lower Costs
376(1)
Empirical Evidence
376(4)
Raising Rivals' Costs
380(6)
Lobbying to Increase Barriers to Entry
381(1)
Increasing Advertising
381(1)
Providing Complementary Goods and Services
382(1)
Sabotaging Corporate Competitors
382(1)
Empirical Evidence on Raising Rivals' Costs
382(3)
Application 12.1 Detergent Wars and the Battle of Good versus Evil: Amway v. Proctor & Gamble
385(1)
Learning by Doing
386(8)
Empirical Evidence on Learning by Doing
388(4)
Application 12.2 Qualitative Learning by Doing in the Motion Picture Industry: The Case of the ``Talkies''
392(2)
Product Proliferation
394(5)
Empirical Evidence on the Use of Product Proliferation
394(5)
Empirical Evidence on the Use of Price and Nonprice Strategies to Deter Entry
399(17)
Summary
402(6)
Appendix: Product Proliferation Revisited
408(8)
PART III BUSINESS PRACTICES
Product Differentiation and Advertising
416(53)
Forms of Product Differentiation
416(1)
Theoretical Analysis of Product Differentiation
417(18)
The Potential Impact of Product Differentiation on Price: The Bertrand Model Revisited
418(2)
The Economics of Monopolistic Competition and the Optimal Amount of Variety
420(8)
Product Differentiation with Asymmetric Information
428(5)
Application 13.1 What Do the Markets for Thoroughbred Racehorses and Baseball Players Have in Common? Product Differentiation, Asymmetric Information, and Adverse Selection
433(2)
The Social Benefits and Costs of Advertising
435(4)
The Social Benefits of Advertising
435(1)
The Social Costs of Advertising
436(3)
Advertising and Market Structure
439(16)
Welfare Effects of Advertising
439(2)
The Dorfman-Steiner Model
441(2)
Advertising and Oligopoly Behavior
443(4)
Application 13.2 The Variability of Advertising-to-Sales Ratios Across Industries
447(4)
The Product Differentiation Advantages of First Movers
451(4)
Advertising as a Barrier to Entry
455(1)
Strategic Advantages of Heavily Advertised Brands
456(1)
Product Differentiation and Increased Competition
457(1)
Empirical Evidence
457(12)
Traditional Studies of the Relationship Between Advertising and Performance Across Industries
458(3)
New Empirical Industrial Organization Studies
461(1)
Summary
462(7)
Technological Change and Research and Development
469(46)
Schumpeter and the Process of ``Creative Destruction''
469(3)
Application 14.1 Examples of Creative Destruction
471(1)
The Process of Technological Change
472(1)
The Relationship Between Market Structure, Firm Size, and Technological Advance
473(13)
The Impact of Oligopoly
475(5)
Dominant Firms as Fast-Second Innovators
480(1)
A Contribution of Game Theory
481(2)
The Theoretical Impact of a Patent System
483(3)
The Impact of Firm Size
486(3)
Empirical Evidence
489(4)
Measurement Issues
489(1)
Testing Schumpeter's Hypotheses
489(4)
The Economics of the Patent System
493(10)
Empirical Evidence on the Impact of Patents
496(3)
Intellectual Property Rights and Copyrights
499(1)
Application 14.2 Why Bother with Intellectual Property Rights? The Case of China
500(3)
Patents, Intellectual Property Rights, and the Law
503(12)
Summary
505(6)
Appendix: Game Theory and Patent Races
511(4)
Price Discrimination
515(47)
Types of Price Discrimination
515(13)
First-Degree Price Discrimination
516(1)
Application 15.1 Microsoft's Attempt to Use First-Degree Price Discrimination
517(1)
Second-Degree Price Discrimination
518(2)
Application 15.2 The Use of Coupons and Second-Degree Price Discrimination
520(2)
The Welfare Effects of Second-Degree Price Discrimination
522(1)
Third-Degree Price Discrimination
523(1)
Welfare Implications of Third-Degree Price Discrimination
523(4)
Application 15.3 Third-Degree Price Discrimination at Disney World
527(1)
Two-Part Tariffs, Tying, and Bundling
528(11)
Two-Part Tariffs
528(2)
The Welfare Effects of a Two-Part Tariff
530(2)
Application 15.4 Changing Pricing Strategies at Disneyland and Disney World
532(1)
Bundling
532(1)
Mixed Bundling
533(5)
Requirements Tie-In Sales
538(1)
Distribution Effects of Price Discrimination
539(1)
Effect on Competition
540(2)
Antitrust: Price Discrimination and the Robinson-Patman Act
542(20)
Secondary-Line Cases
543(5)
Primary-Line Cases
548(3)
Illegally Induced Price Discrimination
551(1)
Summary
552(8)
Appendix: The Welfare Implications of Price Discrimination with Nonlinear Demand
560(2)
Vertical Integration and Vertical Relationships
562(44)
Vertical Relationships as a Solution to Economic Problems
562(4)
The Problem of Double Marginalization
564(2)
Alternative Methods of Achieving Joint Profit Maximization
566(9)
The Problem of Insufficient Promotional Services
567(2)
Application 16.1 Vertical Integration, Exclusive Dealing, and the Value of an Upscale Pub's Amenities in Australia
569(4)
Application 16.2 The Welfare Effects of Exclusive Dealing in the U.S. Beer Industry
573(1)
Solving the Problem of Input Substitution
574(1)
The Competitive Effects of Vertical Relationships
575(10)
Resale Price Maintenance Agreements
575(2)
Application 16.3 Toys ``R'' Us as the Facilitaor of Toy Manufacturer Collusion
577(2)
Strategic Uses of Vertical Restraints and Integration
579(2)
Raising the Capital Barrier to Entry
581(1)
Collusion and Vertical Integration
581(1)
Application 16.4 The Possible Negative Welfare Impacts of Increasing Vertical Integration: The Case of the Southern California Gasoline Retailing Market
582(2)
Foreclosure
584(1)
Antitrust: Public Policy Toward Vertical Restraints of Trade and Group Boycotts
585(21)
Tying Agreements
585(3)
Cases Dealing with Franchising Agreements
588(1)
Exclusive Dealing Agreements
588(3)
Territorial and Customer Restrictions
591(2)
Resale Price Maintenance Agreements
593(3)
Summary
596(5)
Appendix: The Problem of Input Substitution
601(5)
Regulation and Deregulation
606(33)
The Rationale for Regulation: Traditional Public Utility Regulation
606(2)
The Workings of American Regulation
608(3)
Setting the Permitted Rate Of Return
609(2)
Efficiency Problems Associated with Rate of Return Regulation
611(5)
X-Inefficiency
611(1)
The Averch-Johnson Effect
611(3)
Setting the Price Structure
614(2)
The Spread of Regulation into Other Markets
616(3)
The Capture Theory of Regulation
616(2)
Application 17.1 It's More Than Peanuts
618(1)
The Movement from Regulation to Deregulation
619(20)
Surface Transportation
619(1)
Airline Regulation and Deregulation
620(2)
Application 17.2 Airline Regulation: Where Did All the Profits Go?
622(3)
Regulation of Telecommunications and Broadcasting
625(4)
Electricity
629(1)
Application 17.3 Electricity Restructuring: Lights Out in California
630(1)
Natural Gas Industry
631(1)
Summary
632(7)
Glossary639(13)
Answers To Odd-Numbered Problems652(26)
Index678(34)
Credits712
Elizabeth J. Jensen is Professor of Economics at Hamilton College. Don E. Waldman is the Richard M. Kessler Professor of Economic Studies at Colgate University.

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