Department of Economics Tydings 3115H;

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1 Page 1 of 5 University of Maryland Professor Rachel Kranton Department of Economics Tydings 3115H; Office Hours: kranton@econ.umd.edu Thurs. 3:15-5:15 Economics 661 Industrial Organization Spring 2004 This is the second course in the graduate sequence on industrial organization. The course presents models of firm behavior and theories of the firm. A solid background in graduate microeconomics is required (ECON 603/604). The main readings for the course are journal articles, working papers, and the text The Theory of Industrial Organization by Jean Tirole (MIT Press, 1992). Most of the journal articles and working papers are available on the web. Grades will be based on a final examination and one ten-page essay or two five page essays (your choice). The essay(s) should develop one or two research ideas, respectively. The purpose of the essays is to prompt thinking about dissertation topics and the industrial organizational or microeconomic issues that you may encounter in your research. You are encouraged to talk with me about your research ideas and the essays. The essays will due on the last day of class and will constitute 35% of the grade. A cumulative final examination will constitute the remaining 65%. A package of problem sets and exams from last year will be available. The problems on the final exam and the field exam will be similar to those in the problem sets (indeed many problem set questions were exam questions), and you are strongly urged to complete them. 1. Product Selection, Quality, and Advertising * Tirole, Chapter 2 Akerlof, George "The Market for 'Lemons:' Qualitative Uncertainty and the Market Mechanism,"Quarterly Journal of Economics 84, Shapiro, Carl "Premiums for High Quality Products as Rents to Reputation," Quarterly Journal of Economics 98, Milgrom, P. & J. Roberts "Prices and Advertising Signals of Product Quality," Journal of Political Economy 94, Chiang, S.-C. & R. Masson "Domestic Industrial Structure and Export Quality," International Economic Review 29, Product Differentiation * Tirole, Chapter 7 * Salop, S. 1979, "Monopolistic Competition with Outside Goods," Bell Journal of Economics 10,

2 Page 2 of 5 * Grossman, G. and C. Shapiro, "Informative Advertising with Differentiated Products," Review of Economic Studies 51, Thomadsen, Raphael, "Price Competition in Industries with Geographic Differentiation: The Case of Fast Food," mimeo, Stanford University. 2. Search and Switching Costs Diamond, P "A Model of Price Adjustment," Journal of Economic Theory 3, * Klemperer, P "Markets with Consumer Switching Costs, Quarterly Journal of Economics 102, * Farrell, J. and N. Gallini, "Second-Sourcing as Commitment: Monopoly Incentives to Attract Competition," Quarterly Journal of Economics, November, * Taylor, Curtis R "Supplier Switching: Price Discrimination in Markets with Repeat Purchases," mimeograph, Texas A&M University. Ausubel, L "The Failure of Competition in the Credit Card Market, "American Economic Review 81, pp Klemperer, P "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies 62, Vertical Control * Tirole, Chapter 4. * Deneckere, Raymond, Howard Marvel, and James Peck "Demand Uncertainty, Inventories, and Resale Price Maintenance," Quarterly Journal of Economics 111, pp Blair, Benjamin and Tracy Lewis "Optimal Retail Contracts with Asymmetric Information and Moral Hazard," Rand Journal of Economics 25, pp Shepard, Andrea "Contractual Form, Retail Price, and Asset Characteristics in Gasoline Retailing," Rand Journal of Economics 24, pp Theory of the Firm: Overview Overview Readings on Theory of the Firm and Contract Theory: * Tirole, p * Coase, R "The Nature of the Firm," Economica IV,

3 Page 3 of 5 * Holmstrom, B "The Firm as a Subeconomy," Journal of Law, Economics, and Organization 15, pp Holmstrom and Tirole "The Theory of the Firm," in Schmalensee & Willig (eds), Handbook of Industrial Organization, p Williamson, Oliver "Transaction Costs Economics," in Schmalensee & Willig (eds), Handbook of Industrial Organization, p Moral Hazard View of the Firm * Alchian, A. and H. Demsetz "Production, Information Costs, and Economic Organization," American Economic Review 62, * Holmstrom, B. 1979, "Moral Hazard and Observability," Bell Journal of Economics 10, * Holmstrom, B "Moral Hazard in Teams," Bell Journal of Economics 13, Incomplete Contracts, Ownership, and Vertical Integration (i) Hold-up and Investment Incentives: * Klein, Crawford and Alchian "Vertical Integration, Appropriable Rents, and the Competitive Contracting Problem," Journal of Law and Economics 21, * Grossman, S. and 0. Hart "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, Journal of Political Economy 94, * Hart, Oliver, and John Moore "Property Rights and the Nature of the Firm," Journal of Political Economy 98, pp Joskow, P "Vertical Integration and Long Term Contracts: The Case of Coal Burning Electric Generating Plants," Journal of Law, Economics, and Organization 1, (ii) Contracts and Investment Incentives * Rogerson, W "Contractual Solutions to the Hold-Up Problem," Review of Economic Studies 59, * Che and Hausch, "Cooperative Investments and the Value of Contracting," American Economic Review (March), pp Edlin, Aaron S. and Stefan Reichelstein "Holdups, Standard Breach Remedies, and Optimal Investment, " American Economic Review 86, pp

4 Page 4 of 5 7. Relational Contracting and Reputation * Kranton, Rachel "Reciprocal Exchange: A Self-Sustaining System," American Economic Review 86, pp * Baker, George, Robert Gibbons and Kevin Murphy "Relational Contracts and Theory of the Firm," mimeograph, Harvard and MIT. McMillan, John and Christopher Woodruff "Interfirm Relationships and Informal Credit in Vietnam," Quarterly Journal of Economics 114. pp McMillan, J "Reorganizing Vertical Supply Relationships," mimeo, UC San Diego. Banerjee, Abhijit and Esther Duflo "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," mimeograph, MIT. 8. Alternative Industrial Structures * Taylor, Curtis and Steven Wiggins "Competition or Compensation: Supplier Incentives under the American and Japanese Subcontracting System," American Economic Review 87, pp * Kranton, Rachel and Deborah Minehart "Vertical Integration, Networks, and Markets,"mimeograph, University of Maryland. * Helper, Susan, John Paul McDuffie, and Charles Sabel "The Boundaries of the Firm as a Design Problem," mimeograph, Columbia University. Holmstrom, Bengt and John Roberts "The Boundaries of the Firm Revisited," Journal of Economic Perspectives 12, pp Incentives Inside a Firm and Employment Contracts Overview: Gibbons, Robert "Incentives in Organizations," Journal of Economic Perspectives 12, pp * Stole, Lars and Jeffrey Zweibel "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review 86, pp * Holmstrom and Milgrom, "The Firm as an Incentive System," American Economic Review 84, pp MacLeod, W. Bentley and James M. Malcomson "Motivation and Markets," American Economic Review 88, pp, Aghion, Phillipe and Jean Tirole "Formal and Real Authority in Organizations," Journal of

5 Page 5 of 5 Political Economy 105, pp Prendergast, Canice "A Theory of Yes Men," American Economic Review 83, pp