Industrial Organization : Theory and Practice

by: Waldman, Don E.; Jensen, Elizabeth J.

ISBN 13:
9780321376107
ISBN 10:
0321376102
Edition: 3rd
Format: Paperback
Copyright: 07/25/2006
Publisher: Prentice Hall
Newer Edition

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Summary

Written solely for the undergraduate audience, this streamlined Third Edition ofIndustrial Organization: Theory and Practice--which features early coverage of Antitrust--punctuates its modern introduction to industrial organization with relevant empirical data and case studies to show students how to apply theoretical tools.

Preface

xix

PART I THE BASICS OF INDUSTRIAL ORGANIZATION

Introduction

(16)

Two Approaches to the Study of Industrial Organization

(4)

The Structure-Conduct-Performance (SCP) Approach

(3)

The Chicago School Approach

(1)

Static versus Dynamic Models

(1)

Theory and Empiricism

(1)

Government and Industrial Organization

(4)

The Content of the Antitrust Laws

(3)

Enforcement Procedures

(1)

The Global Economy and Industrial Organization

(1)

General Approach of This Book

(4)

Summary

(3)

The Firm and Its Costs

(34)

The Neoclassical Firm

(1)

The Theory of the Firm

(3)

A Firm's Boundaries

(3)

The Structure of Modern Firms

(10)

Separation of Ownership and Control

(1)

Managerial Objectives

(1)

Application 2.1 Executive Compensation: Pay for Performance?

(2)

Application 2.2 X-Inefficiency Goes Extreme: Putting Masseuses, Christmas Trees, Renoirs, and Monets on the Company Payroll

(1)

Feasibility of Profit Maximization

(1)

Application 2.3 How Do Firms Use Rule-of-Thumb Pricing?

(2)

Constraints on Managers

(1)

Application 2.4 Stockholder Revolt at the Happiest Place on Earth: The Disney Stockholders versus Michael Eisner

(3)

The Profit-Maximizing Output Level

(1)

Cost Concepts: Single-Product Firms

(10)

Accounting Costs Versus Economic Costs

(1)

Short-Run Costs of Production

(1)

Application 2.5 When Do Sunk Costs Matter to a Firm?

(4)

Long-Run Costs of Production and Economies of Scale

(2)

Application 2.6 A Measure of Economies of Scale

(3)

Cost Concepts: Multiproduct Firms

(9)

Application 2.7 A Measure of Economies of Scope

(1)

Application 2.8 Are There Economies of Scope in Institutions of Higher Education?

(2)

Summary

(6)

Competition and Monopoly

(37)

The Economics of Perfect Competition

(8)

The Assumptions of Perfect Competition

(2)

The Firm's Supply Curve

(2)

Application 3.1 Short-Run Losses in the Airline Industry

(1)

The Market Supply Curve and Equilibrium

(1)

Properties of Competitive Equilibrium

(1)

Introduction to Welfare Economics

(3)

Application 3.2 Consumer and Producer Surplus and the Basic Theory of the Gains from Trade

(3)

The Economics of Monopoly

(3)

The Relationship Between Marginal Revenue and Price

(2)

Elasticities, the Degree of Market Power, and the Lerner Index

(1)

Welfare Comparison

(6)

Measurement of the Costs of Market Power

(1)

Application 3.3 Monopoly Rent-Seeking in the Pharmaceutical Industry

(2)

Cautions

(1)

Present Value and Discounting

(2)

Antitrust Policy Toward Monopolization

(15)

Early Cases

(1)

Application 3.4 American Tobacco's ``Attempt to Monopolize''

(2)

The Alcoa Era

(1)

Recent Trends in Section 2 Cases

(4)

Summary

(7)

Market Structure

(55)

Concentration in Individual Markets

(7)

Structure-Based Measures

(1)

Application 4.1 Aggregate Concentration

(4)

Definition of the Relevant Market

(2)

Entry and Exit

(17)

Patterns of Entry and Exit

(1)

Entry

(1)

Static or Structural Barriers to Entry

(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)

Glossary

639

(13)

Answers To Odd-Numbered Problems

652

(26)

Index

678

(34)

Credits

712

Industrial Organization : Theory and Practice

9780321376107

0321376102

Summary

Author Biography

Table of Contents

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Industrial Organization : Theory and Practice

9780321376107

0321376102

Summary

Author Biography

Table of Contents

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