Industrial Organization and Public Policy
Spring 2008, Section 601
MW 11:30-12:45, BEB (Rasmussen) 220
Syllabus
Instructor: Matt Berman
Office: Diplomacy Building 507K (ISER)
Phone: 786-5426
E-mail: matt.berman@uaa.alaska.edu
Office hours: M-W 3:00-5:00, and by appointment
Prerequisities: Econ. 201, Econ. 202
Engl. 111 (recommended)
Text: Don E. Waldman and Elizabeth J. Jensen, Industrial Organization:
Theory and Practice, 3rd ed., Reading, Mass.: Pearson Addison
Wesley, 2007.
Industrial organization is the field of economics that
examines the institutions that are engaged in selling and buying goods
and services in market economies. The objective of the field is to assess
performance -- how well particular market institutions work in practice
to satisfy society's wants -- and analyze public policies that might improve
that performance. Industrial organization applies economic theory to look
at factors that determine industry structure, and strategies of behavior
that companies might use to their advantage in different market situations.
The field also includes empirical studies that examine what the real-world
evidence says about the relationship between market structure and economic
performance.
In this course we will develop and use tools of economic analysis
based on the theory of the firm, focusing particularly on theories of imperfect
competition. Some of the types of policy issues addressed include:
- Does purchasing prescription drugs from Canada benefit or harm
US consumers?
- Did electricity deregulation cause blackouts and skyrocketing
prices in California?
- Are court-ordered remedies working to prevent Microsoft from
using its monopoly in computer operating systems to monopolize markets
for software applications?
- Does regulation that requires large operators to offer production
facilities and pipelines to independents assist or impede North Slope oil
and gas development?
- Should individuals be sued for sharing their digital music
files over the internet?
- How much should residential customers have to pay for local
telephone service?
Course Objectives:
- Understand how market structure and conduct
of firms affect performance of sectors of market economies in
general and the U.S. economy in particular.
- Understand how transactions costs influence market
structure and conduct (strategy) of firms, thereby affecting performance.
- Become familiar with public policy issues related
to industrial organization.
- Be able to apply this knowledge to analysis of
specific products and industries.
Class Format and Assignments:
Class sessions consist of a mix of lectures, group discussions, and
workshops. Reading assignments include chapters from the text and limited
additional readings. Class discussions relate to assigned readings and
to field work to investigate market organization in the Anchorage area.
Several problem sets will be assigned on a pass-fail basis that address
more analytical aspects of the course material. Students are encouraged
to work together as much as possible on problem sets, so long as each prepares
his or her own written answers. Material drawn from the problem sets will
be used in interactive in-class exercises, some of which will be graded.
Examinations consist of a mid-term and a final. The final exam is cumulative.
Students will also participate in a group case study that requires a written
report and an oral presentation, as described below.
Case studies:
Each student will participate in a group research project that relates
directly to a current public policy issue in industrial organization. This
semester, potential cases include (1) how to guarantee access by non-pipeline
owners -- either potential gas sellers or buyers -- to a North Slope natural
gas pipeline, (2) conditions under which competition should be permitted
in rural Alaska telecommunications, or (3) one or more initiatives related
to the health care reform. All of these cases involve the choice of an
appropriate regulatory remedy for curbing adverse effects of strategic
behavior of firms under imperfect competition. The emphasis of the group
research projects will be on how best to address the economic incentives
for strategic behavior, rather than on the legal or political issues.
In recognition that there are multiple perspectives on each of thse
issues, the group research projects will involve an in-class debate over
the appropriate remedy. Approximately one-half the students will serve
on opposing teams to debate each case, with students not involved in that
case serving as a panel of judges. Each debate team will prepare a group
report that outlines the important economic principles and public policy
issues, cites the relevant applicable legal precedents, and recommends a
decision. The judges will write reasoned opinions based on the evidence provided
in the reports submitted by both sides and then meet as a group to reach
a collective decision on the case. Students serving as judges for one case
will switch roles for another case, so that everyone argues one case and
judges one case. Guidelines for length, format and documentation of reports
and opinions will be distributed and discussed in class.
Grade Determination:
| Midterm exam: |
20% |
| Final exam |
25% |
| Problem sets |
10% |
| In-class exercises |
5%
|
Case study prospectus
|
5%
|
Final case study report
|
30%
|
Judges' opinion
|
5%
|
Total
|
100%
|
Course Outline
Part I. Principles of Industrial Organization
Jan. 14-16: The modern corporation
Waldman and Jensen: ch. 1, ch. 2 (pp. 17-30).
Topics: Structure, conduct, performance paradigm
Property rights and transactions costs: the boundary of the
firm
Managerial objectives and discretion
Jan. 21: Civil Rights Day (no class)
Jan. 23: Supply-side microeconomics
Waldman and Jensen: ch. 2 (pp. 31-50).
Topics: Profit maximization
Economies
of scale, scope, or density
Perfect competition, monopoly,
monopolistic competition
Jan 28-30: Market structure and performance
Waldman and Jensen: ch. 4 (pp. 88-112), ch. 6.
Topics: Barriers to entry
Firm size
and market concentration
Evidence
of effects of market power
Part II. Corporate Strategy and Market Power
Feb. 4-6: Introduction to corporate strategy
Waldman and Jensen: ch. 7.
Topics: Game theory
Nash
equilibrium
Prisoner's dilemma
Feb. 11-13: Non-cooperative oligopoly models
Waldman and Jensen: ch. 8
Topics: The Cournot and Bertrand oligopoly models
Feb. 18-20: Cooperative oligoply models: collusion
Waldman and Jensen: ch. 9 (pp. 266-289), ch. 10 (pp. 335-326)
Topics: Cartels
Cheating
Feb. 25-27: Advertising and product differentiation
Waldman and Jensen: ch. 13.
Topics:
Monopolistic competition revisited
The textbook market
Financing
political campaigns
March 3: Vertical Integration
Waldman and Jensen: ch. 16.
Topics: The Alaska oil industry
The Microsoft case
March 5: Midterm examination
Mar. 10-12: Spring break
Part III. Public Policy Toward Market Power
Mar. 17-19: Antitrust policy in the U.S.
Waldman and Jensen: ch. 3 (pp. 73-81), ch. 9 (pp. 289-298), ch. 10 (pp.
326-329).
Topics: Sherman Act
Antitrust enforcement over time
March 17: Case study prospectus due
Mar. 24-26: Mergers and competition
Waldman and Jensen: ch. 4 (pp. 113-142).
Topics:
Why firms merge
Clayton Act
Merger guidelines
Mar. 31-Apr. 2: Price discrimination and regulation
Waldman and Jensen: chs 15, 17.
Topics: Price discrimination and
cross-subsidization
The "natural monopoly" and rate of return regulation
`
Deregulation and its consequences
Apr. 7-9: Strategies to deter entry
Waldman and Jensen: ch. 11, 12, in part.
Topics: Predatory pricing
Non-price entry deterrents
Apr. 14-16: Technological change and innovation
Waldman and Jensen: ch. 14.
Topics: Market structure and
innovation
Patents and copyrights
Apr. 21-23: Presentation of case studies
April 23: Written case study
reports due.
April 28: Debate decision
day
May 2: Final
Exam -- 10:00am