Colin Campbell 301B New Jersey Hall campb Office hours by appointment

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1 Spring 2009 Colin Campbell 301B New Jersey Hall campb Office hours by appointment 522: INDUSTRIAL OI%GANIZATION I This course emphasizes reading and understanding important papers in the area of industrial organization. Class time will be occupied by student presentations of papers and lecturing. GRADING: Grades are based on two kinds of assignment. One is the student presentations, which work as follows. Early in the semester, each student will be assigned a number of papers for which he or she is responsible (this number will not be more than four). On the day that a paper is to be discussed, which will be known with certainty at least a week beforehand, the student responsible for that paper should make a prepared presentation of the paper s important points. In addition to the in-class presentation, the student should provide a written handout (handwritten is fine) to the members of the class that summarizes his or her talk. The second assignment is a short paper, which will be due in the last class meeting on April 30. This paper should suggest a research program that you would be interested in undertaking. It is expected to be very preliminary, so theoretical results may be simple and specific sources of empirical data are not required, but it should demonstrate that you have started to think about what kinds of ideas can lead to good research topics. The paper should be at least 4 pages;, more is welcome if you have more to say. Ultimately, this assignment is meant to benefit you by making you start to think about your own research, so the more seriously you take it the more it will benefit you. Note: the paper can address any topic in industrial organization (including, for instance, topics from IO II), not just those covered in this course. Also, instead of a proposal for a new project, you may turn in a revision of the paper you wrote for Professor Sjostrom s IO II course, along with the original paper, so that I may check on your progress. TEXT: There is no required text for the course. Most people interested in Industrial Organization own The Theory of Industrqal Organization (MIT Press, 1988), by Jean Tirole. It is an excellent text and covers many topics, but is now somewhat dated. Game Theor71 (MIT Press, 1991), by Drew Pudenberg and Jean Tirole, is also a good reference book to own. Class lectures are taken primarily from published articles. In the reading list that follows, asterisked papers are those that may be presented by students. I. INTRODUCTION Tirole, Introduction (pages 1-14) II. AUCTIONS Myerson, R. B., Optimal Auction Design, Mathematics of Operations Research 6 (1981), Milgrom, P. and Weber, R. J., A Theory of Auctions and Competitive Bidding, Econometrica 50 (1982), I089-I122. CrOmer, J. and McLean, R. P., Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions, Econometrica 56 (1988),

2 Matthews, S.A., "A Technical Primer on Auction Theory I: Independent Private Values," Northwestern CMSEMS Discussion Paper 1096, Ashenfelter, O., How auctions work for wine and art, Journal of Economic Perspectives 3 (1989), Hendricks, K. and Paarsch, H., A survey of recent empirical work concerning auctions, Canadian Journal of Economics 28 (1995), Laffont, J.-J., Game theory and empirical economics: The case of auction data, European Economic Review 41 (1997), Laffont, J.-J., Ossard, H., and Vuong, Q., Econometrics of First Price Auctions, Econometrica 63 (1995), Guerre, E., Perrigne, I., and Vuong, Q., Optimal Nonparametric Estimation of First Price Auctions, Econometrica 68 (2000), * Hendricks, K. and Porter, R., An Empirical Study of an Auction with Asymmetric Information, The American Economic Review 78 (1988), * Porter, R., The role of information in U.S. offshore oil and gas lease auctions, Econometrica 63 III. NONCOMPETITIVE INDUSTRIAL ORGANIZATION: MONOPOLY Tirole, Chapter 1 * Gul, F., Sonnenschein, H., and Wilson, R., Foundations of Dynamic Monopoly and the Coase Conjecture, Journal of Economic Theory 39 (1986), * Ausubel, L. and Deneckere, R., Reputation in Bargaining and Durable Goods Monopoly, Econometrica 57 (1989), Tirole, Chapter 2 Wolinsky, A., Prices as signals of product quality, Reviewof Economic Studies 50 (1983), Tirole, Chapter 3 * McAfee, R.P., McMillan, J. and Whinston, M.D., Multiproduct monopoly, commodity bundling, and correlation of values, Quarterly Journal of Economies 104 (1989), IV. COMPETITION IN A STABLE INDUSTRY A. Price-quantity competition: static Environments Tirole, Chapter 5 Kreps, D. and Scheinkman, J., Quantity precommitment and Bertrand competition yield Cournot outcomes, Bell Journal of Economics 14 (1983), * Milyo, J. and Waldfogel, J., The Effect of Price Advertising on Prices: Evidence in the Wake of ~ Liquormart, American Economic Review 89 (1999), * Nero, A. and Wolfram, C., Why do manufacturers issue coupons? An empirical analysis of breakfast cereals, RAND Journal of Economics 33 (2002), * McManus, B., Nonlinear Pricing in an Oligopoly Market: The Case of Specialty Coffee, RAND Journal of Economics 38 (2007),

3 B. Price-quantity competition: dynamic environments Tirole, Chapter 6 Green, E. and Porter, R., Non-cooperative collusion under imperfect price information, Econometrica 52 (1984), * Porter, R., A study of cartel stability: The joint economic committee, , Bell Journal of Economics 14 (1983), * Rotemberg, J. and Saloner, G., A supergame-theoretic model of business cycles and price wars during booms, American Economic Review 76 (1986), * Maskin, E. and Tirole, J., A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs, Econometrica 56 (1988), * Maskin, E. and Tirote, J., A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles, Econometrica 56 (1988), Borenstein, S. and Shepard, A., Dynamic pricing in retail gasoline markets, RAND Journal of Economics 27 (1996), * Bernheim, B.D. and Whinston, M.D., Multimarket contact and collusive behavior, RAND Journal of Economics 21 (1990), * Evans, W.N. and Kessides, I.N., Living by the golden rule : Multimarket contact in the U.S. airline industry, Quarterly Journal of Economics 109 (1994), * Hendel, I. and Nevo, A., Measuring the Implications of Sales and Consumer Inventory Behavior, Econometrica 74 (2006), * Bajari, P., Benkard, L., and Levin, J., Estimating Dynamic Models of Imperfect Competition, Econometrica 75 (2007), * Pakes, A., Ostrovsky, M., and Berry, S., Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Examples), RAND Journal of Economics 38 (2007), C. Reputation Building * Tadelis, S., What s in a Name? Reputation as a Tradeable Asset, American Economic Review 89 (1999), * Mailath, G.J. and Samuelson, L., Who Wants a Good Reputation?, Review of Economic Studies 68 (2001), D. Price Search Varian, H., A model of sales, American Economic Review 70 (1980), Burdett, K. and Judd, K.L., Equilibrium Price Dispersion, Econometrica 51 (1983), Stahl, D. O., Oligopolistic Pricing with Sequential Consumer Search, American Economic Review 79 (1989), * Fershtman, C. and Fishman, A., Price Cycles and Booms: Dynamic Search Equilibrium, American Economic Review 82 (1992),

4 E. Product Selection Tirole, Chapter 7 Hotelling, H., Stability in Competition, Economic Journal 39 (1929), Prescott, E. and Visscher, M., Sequential location among firms with foresight, Bell Journal of Economics 8 (1977), D Aspremont, C., Gabszewicz, J., and Thisse, J. F., On Hotelling s Stability in Competition, Econometrica 47 (1979), * Shaked, A. and Sutton, J., Natural Oligopolies, Econometrica 51 (1983), * Bresnahan, T., Competition and collusion in the american automobile industry: The 1955 price war, Journal of Industrial Economics 36 (1987), * Berry, S., Estimating discrete choice models of oligopoly product differentiation, RAND Journal of Economics 25 (1994), * Berry, S., J. Levinsohn and A. Pakes, Automobile Prices in Market Equilibrium, Econometrica 63 (1995), * Goldberg, P., Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry, Econometrica 63 (1995), Nero, A., A Practitioners Guide to Estimation of Random Coefficients Logit Models of Demand, Journal of Economics and Management Strategy 9 (2000), * Nevo, A., Measuring Market Power in the Ready-to-Eat Cereal Industry, Econometrica 69 (2001), * Berry, S., J. Levinsohn and A. Pakes, Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market, Journal of Political Economy 112 (2004), V. ENTRY AND STEADY-STATE SELLER CONCENTRATION Novshek, W., Cournot Equilibrium with l@ee Entry, Review of Economic Studies 47 (1980), Mankiw, N.G. and Whinston, h/i.d., Free entry and social inefficiency, Rand Journal of Economics 17 (1986), Sutton, J. (1991): Sunk costs and market structure. Cambridge, MA: MIT Press, Chapters 2 and 3. * Sutton, J., One smart agent, RAND Journal of Economics 28 (1997), * Bresnahan, T. and Reiss, P., Entry and competition in concentrated markets, Journal of Political Economy 99 (1991), * Berry, S., Estimation of a model of entry in the airline industry, Econometrica 60 (1992), * Berry, S. and Waldfogel, J., Free entry and social inefficiency in radio broadcasting, RAND Journal of Economics 30 (1999), VI. TURNOVER AND INDUSTRY DYNAMICS Jovanovic, B., Selection and the evolution of industry, Econometrica 50 (1982),

5 * Hopenhayn, H., Entry, exit and firm dynamics in long run equilibrium, Econometrica 60 (1992), Dunne, T., Roberts, M., and Samuelson, L., Patterns of firm entry and exit in U.S. manufacturing, RAND Journal of Economics 19 (1988), VII. ENTRY DETERRENCE AND PREDATION Tirole, Chapters 8 and 9 Dixit, A., The role of investment in entry deterrence, Economic Journal 90 (1980), * Milgrom, P. and Roberts, J., Limit pricing and entry under incomplete information: An equilibrium analysis, Econometrica 50 (1982), Fudenberg, D. and Tirole, J., A "Signal-Jamming" Theory of Predation, RAND Journal of Economics 17 (1986), * Cabral, L. and Riordan, M., The Learning Curve, Market Dominance and Predatory Pricing, Econometrica 62 (1994), VIII. R~D Tirole, Chapter 10 Jovanovic, B. and MacDonald, G., Competitive Diffusion, Journal of Political Economy 102 (1994), Oster, S., The diffusion of innovation among steel firms: The basic oxygen furnace, Bell Journal of Economics 13 (1982), * Bresnahan, T., Measuring the spillovers from technical advance: Mainframe computers in financial services, American Economic Review 76 (1986), * Trajtenberg, M., The welfare analysis of product innovations, with an application to computed tomography scanners, Journal of Political Economy 97 (1989), * Hendricks, K. and Porter, R., The timing and incidence of exploratory drilling on offshore wildcat tracts, American Economic Review 86 (1996), IX. NETWORK EXTERNALITIES Tirole, Chapter 10 Gandal, N., Hedonic price indices for spreadsheets and an empirical test for network externalities, RAND Journal of Economics 25 (1994), * Saloner, G. and Shepard, A., Adoption of technologies with network effects: An empirical examination of the adoption of automated teller machines, RAND Journal of Economics 26 (1995), X. VERTICAL INTEGRATION AND I~ESTRAINTS Tirole, Chapter 4 Groff, R. and Perry, M.K., Resale price maintenance and forward integration into a monopolistically competitive industry, Quarterly Journal of Economics 100 (1985),

6 * Deneckere, R., Marvel, H.P., and Peck, J., Demand uncertainty and price maintenance: Markdowns as destructive competition, American Economic Review 87 (1997), Whinston, M., Tying, foreclosure, and exclusion, American Economic Review 80 (1990), Hart, O. and Tirole, J., Vertical integration and market foreclosures, Brookings Papers on Economic Activity: Microeconomics (1990), Bolton, P. and Whinston, M., Incomplete contracts, vertical integration, and supply constraints, Review of Economic Studies 60 (1993),