EconS Introduction / History of Industrial Organization

Transcription

1 EconS Introduction / History of Industrial Organization Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 26

2 Welcome! Welcome to EconS Industrial Organization I m Eric 4th year Ph.D. Student. My Research is on Industrial Organization and Game Theory. Current paper: Strategic Campaign Finance. Eric Dunaway (WSU) EconS 425 Industrial Organization 2 / 26

3 Introductions Who are you? Name. Major (If not Econ). Plans for next year. Favorite Pokémon. Eric Dunaway (WSU) EconS 425 Industrial Organization 3 / 26

4 Why Study I/O? Why should you be interested in Industrial Organization? Eric Dunaway (WSU) EconS 425 Industrial Organization 4 / 26

5 Why Study I/O? The perfectly competitive market has severe limitations, in both its scope and its applicability to the real world. How many markets in the real world do you think are perfectly competitive? Most markets utilize some form of market power, where one or more agents decisions in uence the equilibrium price. Eric Dunaway (WSU) EconS 425 Industrial Organization 5 / 26

6 Why Study I/O? Our goal with Industrial Organization is to ll in the gap between the theory of the perfectly competitive market and reality. We do this by creating several forms of imperfect competition: monopoly, oligopoly, mergers, product di erentiation, integration, etc. Remember that even like the perfectly competitive market, what you learn in this class is still theory, i.e., it s an approximation of reality. Industrial organization creates a more accurate approximation, however. Eric Dunaway (WSU) EconS 425 Industrial Organization 6 / 26

7 Learning Objectives What you will learn in this class: Several forms of imperfect competition. Cost structures, and how they in uence the relationship between suppliers and producers. Di erentiating products based on tastes and quality. E cient mergers between rms. Advertising and Research & Development. Network E ects. And more! Eric Dunaway (WSU) EconS 425 Industrial Organization 7 / 26

8 Learning Objectives What you will not learn in this class: How to corner the stock market. How to manage your grandparent s investment portfolio. Why our football team always seems to lose the rst two games of the season. Who Rey s parents are. Eric Dunaway (WSU) EconS 425 Industrial Organization 8 / 26

9 Book Contemporary Industrial Organization: A Quantitative Approach By Lynne Pepall, Dan Richards, and George Norman. ISBN: It s pretty easy to read, but it also presents some very advanced math. Come to me with questions about it, I am happy to explain what is going on. Eric Dunaway (WSU) EconS 425 Industrial Organization 9 / 26

10 Lectures Monday and Wednesday - 3:10-4:00 PM. Friday - 2:10-3:00 PM Why earlier? The department holds a research seminar every Friday at 3:00 PM. You are all welcome to join us, but attendance is not required. I will post lecture slides on Blackboard before class. Sometimes the night before, sometimes the hour before. Feel free to print them out and annotate them in class. Eric Dunaway (WSU) EconS 425 Industrial Organization 10 / 26

11 Grading Bi-weekly problem sets: 25% 3 Quizzes: 15% Midterm: 30% March 3rd, 2017 Final: 30% May 4th, 2017 from 3:10-5:10 PM The Final is not cumulative. Eric Dunaway (WSU) EconS 425 Industrial Organization 11 / 26

12 Grade Scale A few guarantees: >90% - A >80% - B >70% - C >60% - Pass Everything else is up to my discretion. Also, I reserve the right to raise anyone s grade for whatever reason I may have. Eric Dunaway (WSU) EconS 425 Industrial Organization 12 / 26

13 Homework I assign a homework problem at the end of (almost) every lecture. They are designed to take minutes to solve. At the end of every other week, I will collect one of the homework problems at random and grade it. Homework is due the moment I call for its submission. No late homework is accepted. See the syllabus for more details. Eric Dunaway (WSU) EconS 425 Industrial Organization 13 / 26

14 Expectations My expectations: Enhance your modelling and quantitative skills. Develop strong explanatory and intuitive understanding of these models. Be a high quality human being. Eric Dunaway (WSU) EconS 425 Industrial Organization 14 / 26

15 Resources I do a lot of work with the Global Campus I ll be turning this class into an online version this summer. That being said, I have access to a lot of resources that may be useful. The lightboard is your friend. Eric Dunaway (WSU) EconS 425 Industrial Organization 15 / 26

16 Questions Any Questions? Eric Dunaway (WSU) EconS 425 Industrial Organization 16 / 26

17 History of I/O Let s spend the rest of this day talking about how industrial organization came to be. This is basically a summary of Chapter 1 of your textbook. Modern economics was born in 1776 when Adam Smith published his masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations. He described the perfectly competitive market, invisible hand, and basically set the foundation for all of what we do today. Eric Dunaway (WSU) EconS 425 Industrial Organization 17 / 26

18 History of I/O Smith also predicted market power. A quote from Wealth of Nations: "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." "The monopolists, by keeping the market constantly understocked, by never fully supplying the e ectual demand, sell their comodoties much above the natural prices..." Eric Dunaway (WSU) EconS 425 Industrial Organization 18 / 26

19 History of I/O People generally had faith in the perfectly competitive market. Market power was mostly ignored until almost the 20th century. The Sherman Act, passed in 1890, was the USA s rst antitrust act. It aimed to reduce collusion and the formation of monopolies. However, there wasn t any scienti c basis to detect anticompetitive behaviors. Almost no economic research had focused on these concepts in a way that could be presented to the courts. Eric Dunaway (WSU) EconS 425 Industrial Organization 19 / 26

20 History of I/O In 1929, the Great Depression changed everything. For the rst time, there was hard evidence that there existed problems with the perfectly competitive market. Before this, there was simply the study of economics; afterward, the disciplines of microeconomics and macroeconomics split into their separate elds. The drive to explain imperfect competition came soon afterwards. Eric Dunaway (WSU) EconS 425 Industrial Organization 20 / 26

21 SCP Approach The rst successes came in 1933 and 1939, when Chamberlin and Mason developed the Structure-Conduct-Performance (SCP) approach to measure the impact of rms with large market shares on the public. This approach contained empirical techniques that were measurable. Finally, the courts had something to work with. Several trusts were broken up, including Alcoa, the three largest tobacco rms, and the Grinnel Corporation. They seemed to suggest that if a rm was large enough, its impact on a market was surely detrimental. Eric Dunaway (WSU) EconS 425 Industrial Organization 21 / 26

22 The Chicago School An alternative approach was presented in the 1970s by economists Posner, Bork, and Peltzman at the University of Chicago. They showed that the larger rms could exist because they have better internal cost structures. Perhaps the creation of that rm was a natural process? This casted doubt on the SCP approach s credibility, and shifted the focus to the cost structure of rms, rather than their size relative to the market. Admittedly, SCP had several aws. Eric Dunaway (WSU) EconS 425 Industrial Organization 22 / 26

23 Post Chicago In the 1990s, the industrial organization paradigm shifted again with the development of game theory by Von Neumann, Morgenstein, and Nash. Their work suggested that people and rms behave strategically, and how they are reacting to other agents plays a role in their decision making. This opened up numerous models for analysis and testing. Almost all industrial organization research since then has focused on the game theoretic behavior of those involved. Eric Dunaway (WSU) EconS 425 Industrial Organization 23 / 26

24 Summary Industrial Organization is a relatively young eld in economics, but it does a great job of approximating reality. It has gone through several periods in the last century, and still has a lot of room to grow. We ll be looking at where it has been, and where it s going. Eric Dunaway (WSU) EconS 425 Industrial Organization 24 / 26

25 Next Time Review of the perfectly competitive and monopoly market structures. Reading: Section 2.1 Eric Dunaway (WSU) EconS 425 Industrial Organization 25 / 26

26 Assignment 1-1 Log into Blackboard and introduce yourself again on the discussion forums. Provide the following information: Name Preferred address Major Areas of interest (either academic or career interests are ne) Are you interested in a project for this class? If so, then what would you like to do? What kind of online resources would you like to see? Eric Dunaway (WSU) EconS 425 Industrial Organization 26 / 26