1. Lynne Pepall Dan Richards George Norman
Industrial Organization: contemporary theory and practice (3rd edition)
Lynne Pepall
Dan Richards
George Norman
Industrial Organization: Chapter 1

2. Industrial Organization: Chapter 1
Introduction
How firms behave in markets
Whole range of business issues
price of flowers; payment to be official sponsor of major events
which new products to introduce
merger decisions
methods for attacking or defending markets
Strategic view of how firms interact
Industrial Organization: Chapter 1

3. Industrial Organization: Chapter 1
How should a firm price its product given the existence of rivals?
How does a firm decide which markets to enter?
Incredible richness of examples:
Microsoft/Netscape/Sun
ADM (collusion)
Toys R Us (exclusive dealing)
American Airlines (predatory pricing)
Merger wave
At the heart of all of this is strategic interaction
Industrial Organization: Chapter 1

4. Industrial Organization: Chapter 1
Rely on the tools of game theory
focuses on strategy and interaction
Construct models: abstractions
well established tradition in all science
physics
engineering
are SUVs safe?
Do seat-belts/Volvos save lives?
Industrial Organization: Chapter 1

5. The New Industrial Organization
The “New Industrial Organization” is something of a departure
theory in advance of policy
recognition of connection between market structure and firms’ behavior
Contrast pricing behavior of:
grain farmers at first point of sale
gas stations: Texaco, Mobil, Exxon
computer manufacturers
pharmaceuticals (proprietary vs. generics)
Industrial Organization: Chapter 1

6. Industrial Organization: Chapter 1
Do not say much about the internal organization of firms
vertical organization is discussed
internal contracts are not
Industrial Organization: Chapter 1

7. Anti-trust Policy: an overview
Developments in modern IO are sensitive to the policy context
Microsoft and ADM
highlight aspects of developments in policy/law and economic theory
Need for anti-trust policy recognized by Adam Smith (1776)
“The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price.”
Industrial Organization: Chapter 1

8. Industrial Organization: Chapter 1
“People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Sherman Act 1890
Section 1: prohibits contracts, combinations and conspiracies “in restraint of trade”
Section 2: makes illegal any attempt to monopolize a market
contrast per se rule
collusive agreements/price fixing
rule of reason
“unreasonable” conduct
Industrial Organization: Chapter 1

9. Industrial Organization: Chapter 1
Clayton Act (1914)
intended to prevent monopoly “in its incipiency”
makes illegal practices that “may substantially lessen competition or tend to create a monopoly”
Federal Trade Commission established in the same year
However, application affected by rule of reason
proof of intent
“the law does not make mere size an offence or the existence of unexerted power an offence - it does not compel competition nor require all that is possible.”
Industrial Organization: Chapter 1

10. Industrial Organization: Chapter 1
Robinson-Patman (1936)
prohibits price discrimination that is intended to lessen competition
intended to prevent aggressive price discounting
The Alcoa case (1945) was also important
90% market share
expanded capacity in advance of market expansion
inferred anti-trust violation from structure and conduct without overt evidence
More relaxed attitude in last two decades
emergence of large firms: merger waves
importance of global competition
Industrial Organization: Chapter 1

11. The New Industrial Organization
Dissatisfaction with the structure-conduct-performance approach
collect profit data on firms in an industry
explain differences using information on size, organization, R&D, financial leverage etc.
but what is the direction of causation?
The “old” IO has limited treatment of product differentiation
representative firm, little strategic interaction
New IO: strategic decision-making (Hotelling)
scheduling of “blockbuster” and Disney movies
Industrial Organization: Chapter 1