Industrial Economics

Industrial Economics

Professor Michael Waterson

Industrial economics is about understanding the effects of the behaviour of firms in imperfectly competitive markets. Most markets are imperfectly competitive.

Learning outcomes: Students should achieve an understanding of

(a)some of the most important theories concerning the organization of industries and the behaviour of firms within those industries

(b)a range of business pricing and related practices viewed through the lens of economics.

(c)how people have tested the theories in the context of real-world situations.

They should also have some appreciation of how industrial Economics can contribute to economic policy with respect to imperfectly competitive markets.

The overall aim of the course is to move from abstract modelling to explaining and understanding more practical phenomena.

Transferable skills: Students should develop modelling skills, problem solving skills, plus skills in interpreting econometric results and understanding testing procedures.

Assessment method: Formal assessment will be 100% by written examination. The examination is likely to contain both problems and essay topics, with students having to attempt both types of question. Students will be given practice examples of these during the course, to gain practice.

List of Topics

(some of these will be longer than others)

Introduction
Models of oligopoly behaviour
Development of oligopoly models and the rudiments of testing
Modelling entry and concentration
Search and switching models- consumer behaviour
Horizontal and vertical product differentiation models
Types of advertising and their impact
Empirical modelling of product differentiated markets, including “structural” approaches
Price discrimination and bundling as techniques
Vertical integration and vertical restraints
Competition policy/ Antitrust: key economic issues and practices.

The course will comprise of six hours per week (two sessions of three hours), over six weeks. This will include lectures, discussion and problems.

Reading List

The most appropriate text for this course is

P Belleflamme and M Peitz, Industrial Organization: Markets and Strategies, (Cambridge University Press, 2010)

Essentially, we will be covering broadly topics I to V of this book, together with small amounts of other parts. (Industrial organization is another name for industrial economics, favoured particularly in North America). The book does not cover exactly the topics we will encounter, though; in particular it is a little short on empirical material.

Alternative books include:

Carlton and Perloff, Modern Industrial Organization, (Pearson)

A very useful set of readings is provided in the Handbook of Industrial Organization, particularly vol. 3, if this is available.

Below are listed a few suggested readings per topic, for topics where the text needs supplementing or additional insights can be provided. Some of these are more demanding than others; students will not be expected to understand all of each of them.

Topic 1:

D. Genesove and W.P. Mullin “Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914” RAND Journal of Economics 29, n2 (Summer 1998): 355-77.

Topic 2:

T. Bresnahan, 1982, “The oligopoly solution concept is identified”, Economics Letters, 10, 87-92.

Corts, K., (1999), “Conduct parameters and the measurement of market power”, Journal of Econometrics, 88. 227-50.

C. Wolfram (1999), ‘Measuring Duopoly Power in the British Electricity Spot Market’, American Economic Review, 89 (4), September, 805-26.

Topic 3:

W Baumol, J Panzar and R Willig Contestable markets: an uprising in the theory of industry structure: Reply, American Economic Review 73, (June 1983), 491-496.

T Bresnahan and P Reiss Entry and competition in concentrated markets, Journal of Political Economy 99 (October 1991), 977-1009.

Waterson, M. “The determinants of market structure” chapter 12 in W Dale Collins (ed) Issues in Competition Law and Policy vol. 1, American Bar Association, 2008. (late revised copy available on webpage).

Topic 4:

Waterson, M., 2003, “The role of consumers in competition and competition policy”, International Journal of Industrial Organization, 21, 129-150.

Giulietti, M., Waddams, C. and Waterson, M., 2005, “Consumer choice and competition policy: a study of UK energy markets”, Economic Journal, 115, 949-968.

Sorensen, A., 2000, “Equilibrium price dispersion in retail markets for prescription drugs”, Journal of Political Economy, 108, 833-50.

Brown, J. and Goolsbee, A. (2002) “Does the internet make markets more competitive: evidence from the life insurance industry”, Journal of Political Economy, 110, 481-507.

Topic 5:

Manez, J. and Waterson, M. “Multiproduct firms and product differentiation: a survey”, Warwick Economics Research Paper, no 594, 2001.

J. Sutton (1991), ‘Econometric Evidence’, in Sunk Costs and Market Structure, Chapter 5, MIT Press, London and Cambridge MA, 111-28

S. Berry (1992), ‘Estimation of a Model of Entry in the Airline Industry’, Econometrica, 60, July, 889-917

Topic 6:

Dixit and Norman, 1978, “Advertising and welfare”, Bell Journal of Economics,

9, 1-17.

Ackerberg, D., 2001, “Empirically distinguishing informative and prestige effects of advertising”, RAND journal of Economics, 32(2),

Dranove, D. and Jin, G., 2010, “Quality disclosure and certification: theory and practice”, Journal of Economic Literature, 48, 935-63.

Topic 7:

Nevo, A, 2000, “A Practitioner's Guide to Estimation of Random Coefficients Logit Models of Demand, Journal of Economics & Management Strategy, 9(4), 513-548.

J. Hausman and G. Leonard (2002), ‘The Competitive Effects of a New Product Introduction: a Case Study’, Journal of Industrial Economics, 50, September, 237-63

Petrin, A. (2002), “Quantifying the effects of new products: the case of the minivan”, Journal of Political Economy, 110, 705-29.

Topic 8:

Armstrong, M. (2006) “Recent developments in the economics of price discrimination”, Mimeo available at

C S Chu, P Leslie and A Sorensen, 2007, “Nearly optimal pricing for multiproduct firms”, mimeo, available at

Waterson, M. (2010), “Your call: eBay and demand for the iPhone 4”, Warwick Economic Working Paper 949. (International Journal of the Economics of Business, 2012)

Topic 9:

Waterson, M., 1993, “Vertical integration and vertical restraints”, Oxford Review

of Economic Policy, 9(2), 41-57.

Lafontaine and Slade, 1997, “Retail contracting, theory and practice”, Journal of

Industrial Economics, 45, 1-25.

Topic 10:

Chapters 14 and 15 of Belleflamme and Peitz provide a good coverage of the theory here.

M Motta: Competition Policy (CUP) provides a more complete account, including legal aspects.

Michael Waterson

June 2013