Economics 696P Industrial Organization and Regulation I

Transcription

1 Economics 696P Industrial Organization and Regulation I Professor Stan Reynolds University of Arizona Fall 2017 Class Meetings Tuesdays 12:30-3 pm in McClelland 401KK Contact Information McClelland 401MM; reynolds@eller.arizona.edu Office Hours By appointment Overview This is the first course in a two-semester sequence in Industrial Organization (IO) and Regulation. This course is intended to familiarize students with research and methods at the frontiers of IO and Regulation. The focus is on theoretical and conceptual material. My main goals are (1) to provide students with a solid understanding of the structure of markets and how market structure influences the strategic behavior of firms and their customers; and (2) to help students begin their own research agenda. The second course in the sequence, Economics 696Q, focuses on empirical research. There is a huge volume of published research in Industrial Organization so the coverage of material is, by necessity, somewhat selective. Students interested in this field are strongly encouraged to take courses in advanced microeconomic theory, game theory, behavioral economics and econometrics. IO is an important field within academic economics. In addition, IO has value for those who pursue careers in public policy analysis (e.g., in agencies dealing with utility regulation, antitrust, or consumer protection), in management consulting (especially around IO issues on pricing, mergers, intellectual property, and competition analysis), and in fields with overlapping areas of interest such as marketing, business strategy, and information systems. Learning and Doing IO Here are suggestions for how to approach the material in this course. First off, I require that you read selected papers ahead of time; that is, before we cover them in class. Also, re-read the papers after class and make sure you understand them. For a theory paper, this will likely involve being able to answer the following questions: 1. What is the paper about? What is the central question addressed in the paper? What is the bottom line, in terms of results? If Andreas Blume stopped you in the elevator and asked, What was that paper about?, what would you tell him? 2. Even before getting into the nuts and bolts of the paper Is it an interesting question? Does it help you better understand the world? What answer would you have expected for the research question, prior to reading the paper?

2 What are the main forces/mechanisms that you think are at work in the economic situation? Does the analysis of the paper capture these main forces? What is the consequence/implication of their results? Are there other potential applications of the insight in the paper? 3. Next take a look at the model. You should be able to articulate its underlying structure, even if the model is not formally specified as a game. Who are the players (how many)? What are actions/strategies? payoffs? What are rules/timing? What are informational assumptions? What is equilibrium concept? 4. Some of these questions may be difficult to answer at first. You may need to review the paper and in some cases, to read through references. In particular, it is useful to understand what is novel or unusual in the set up of the game (functional form of payoffs, information available to players, ). 5. What is key driver(s) of results? [Often, this has something to do with #4.] Can you articulate the driving economic mechanism behind the results? 6. If you ve seen the central forces and how they connect with the set-up of the model then it s easier to think about (a) how plausible the mechanism is in the economic application, (b) how robust the effect is, and (c) how sensitive are results to particular and/or peculiar assumptions? Once you can understand answers to the 6 points above for the papers we cover in class, you are in a better position to think about how to formulate and address your own research questions. Outside of classwork, I strongly recommend that you attend IO-related seminars. These may in any of the department s seminar series. These will give you a sense of where the frontier is, and will give you insight into how the process of research actually works (rather than seeing the culmination of that process). Course Requirements For each section I list required readings (marked by * ) as well as additional readings for students interested in further exploration. Class time will consist of lectures and discussions of readings and problem sets. The discussions will cover a variety of issues, including research methods, open research questions in the area, public policy issues, and assigned problem sets. I will let students know which required readings should be completed prior to our class meetings, and will expect students to be familiar with the material during our class meetings. 1. Problem Sets (40 percent) Several problem sets will be assigned. 2. Participation (10 percent) Where the syllabus lists a paper with a star next to it, this indicates reading is required before class. This paper will be discussed in class and an 2

3 inability to discuss the paper will reflect badly on you and, more importantly, you won t get much from the class. 3. Paper presentation and referee report (20 percent) Each student will present a paper at one of our class meetings. Consult with the instructor about what to present. An important aspect of doing research (and for that matter of a successful academic career) is the ability to evaluate work - most importantly your own, but also others. 4. Take-home Final Exam or research proposal (30 percent) Due Monday, December 11 by 5 pm Problem sets, solutions, selected readings and other materials will be posted on D2L. Books Below is a list of books that are useful for work in Industrial Organization. Jean Tirole, The Theory of Industrial Organization. London: MIT Press, This is a recommended purchase. It is almost 30 years old but remains an invaluable reference. Ran Spiegler, Bounded Rationality and Industrial Organization, 2011 S. Anderson, A. de Palma, and J. Thisse, Discrete Choice Theory of Product Differentiation. London: MIT Press, 1992 Handbook of Industrial Organization, vol. 3, edited by M. Armstrong and R. Porter, Very expensive, but a good reference. Dan Spulber, Market Microstructure: Intermediaries and the Theory of the Firm. Cambridge Univ. Press, 1999 John Sutton, Technology and Market Structure, MIT Press, 1998 Luis Cabral, Introduction to Industrial Organization, 2000 or, Oz Shy, Industrial Organization, 1996 [undergraduate versions of Tirole that are useful when you want to see the simplest possible version of a model] Paolo Buccirossi (ed.) Handbook of Antitrust Economics,

4 Outline and Readings 1 Class 1: Introduction to Course Introduction to the field; discussion of the nature and role of the firm. * Jean Tirole, Market Failures and Public Policy, AER, June (2015) * Tirole, The Theory of Industrial Organization (pp ); available on D2L Hart, O., Incomplete Contracts and Control, AER July (2017) Spulber, ch. 9 in Market Microstructure, Transactions costs and the contractual theory of the firm Acharya, V. and Bisin, A., Managerial hedging, equity ownership, and firm value, RAND Jour of Economics, 40 Spring (2009) Class 2: Incentive Regulation Economies of scale and scope; Welfare analysis; optimal regulation * Tirole, The Theory of Industrial Organization, Introduction (pp. 6-13) * Armstrong, M. and D. Sappington, Recent Developments in the Theory of Regulation, ch. 27 (pp this corresponds to pp for the pdf copy on D2L), vol. 3, Handbook. Basso, L, N. Figueroa, and J. Vasquez, Monopoly Regulation under Asymmetric Information: Prices versus Quantities RAND Jour of Economics, Fall (2017) Class 3: Market Power and Price Discrimination Price discrimination; Two-part tariffs; Non-linear pricing; * Hermalin, B., Second-degree Price Discrimination, chapter 5, pp in Lecture Notes for Economics, * Rochet, J.-C., and Stole, L., Nonlinear pricing with random participation, Review of Econ Studies (2002) Stole, L., Price Discrimination and Competition, ch. 34 vol. 3, Handbook; pp in the pdf copy on D2L 1 Reading assignments are preliminary and subject to change during the semester. 4

5 Segal, I., Optimal Pricing Mechanisms with Unknown Demand, American Economic Review (June 2003) Board, S., and Skrzypacz, A., Revenue Management with Forward-Looking Buyers, JPE 124 (August 2016). Levin, J., Auction Theory notes (2004); available on D2L Hendel, I., and Lizzeri, A., Interfering with Secondary Markets RAND Jour of Economics 30 (Spring 1999) Corts, K., Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment RAND Jour of Economics, 29 (Summer 1998) Dana, J., "Equilibrium price dispersion under demand uncertainty" RAND Jour of Economics, 30 (Winter 1999) Armstrong, M., Price Discrimination by a Many-Product Firm Rev of Econ Studies 66 (1999) Class 4: Durable Goods Monopoly *Tirole, The Theory of Industrial Organization ch. 3 (pp ); ch. 1 (Supplementary Section pp ) * Reynolds, S., Durable Goods Monopoly: Laboratory Market and Bargaining Experiments, RAND Jour of Economics. (Summer 2000) Cason, T. and T. Sharma, Durable Goods, Coasian Dynamics, and Uncertainty: Theory and Experiments Jour of Political Economy (2001) Waldman, M., Durable Goods Theory for Real World Markets, J. Econ. Perspectives, 17 (Winter 2003) Tirole, J., From Bottom of the Barrel to Cream of the Crop: Sequential Screening with Positive Selection Econometrica, July (2016) Classes 5, 6 & 7: Oligopoly Markets Cournot; Bertrand; Collusion; Product differentiation; Network effects * Mankiw, N.G. and Whinston, M., Free Entry and Social Inefficiency, RAND Journal of Economics, 17 (1986) * Amir, R. and Lambson, V., On the Effects of Entry in Cournot Markets, Rev of Economic Studies, 67 (2000) * Anderson, Discrete Choice Theory, ch. 7 (pp ); available on D2L 5

6 * Bedre-Defolie, O. and G. Biglaiser, Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers AER, July (2017) Tirole, The Theory of Industrial Organization, ch. 5 (pp ) & ch. 6 (pp ) Reynolds, S. and Rietzke, D., Price Caps, Oligopoly, and Entry, forthcoming in Economic Theory. Ide, E., J. Montero, and N. Figueroa, Discounts as a Barrier to Entry, AER 106 (2016) Acemoglu, D. and M. Jensen, Aggregate comparative statics, Games and Economic Behavior, 81 (2013) Amir, R. and Lazzati, N., Network Effects, Market Structure, and Industry Performance, Jour of Economic Theory, 146 (2011) Athey, S. and Bagwell, K., Optimal Collusion with Private Information," RAND Journal of Economics, Autumn (2001) S. Anderson, A. de Palma, and Y. Nesterov, Oligopolistic Competition and the Optimal Provision of Products, Econometrica, Vol. 63, No. 6, November (1995) Amir, R., Cournot Oligopoly and the Theory of Supermodular Games, Games and Economic Behavior, 15 (1996) Reynolds, S. and Wilson, B., Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes Jour. of Economic Theory (2000) Earle, R., Schmedders, K., and Tatur, T., On price caps under uncertainty, Review of Economic Studies, 74 (2007) Bulow, J., J. Geanakoplos, and P. Klemperer, Multimarket Oligopoly: Strategic Substitutes and Complements, JPE (1985) Klemperer, P., Competition when Consumers have Switching Costs Rev of Econ Studies 62 (1995) Dufwenberg, M. and U. Gneezy, Price Competition & Market Concentration: An Experimental Study, International Journal of Industrial Organization 18 (2000) Kruse, J., Rassenti, S., Reynolds, S., and Smith, V.L., "Bertrand Edgeworth Competition in Experimental Markets," Econometrica (March 1994) Classes 8 & 9: Behavioral Economics and IO This section examines how behavioral biases mainly on the consumer side affect strategic behavior and market outcomes. * Grubb, M., Selling to Overconfident Consumers, AER 93 (2009) 6

7 * Heidhues, P. and Koszegi, B., Exploiting Naivete about Self-Control in the Credit Market, AER 100 (2009) Spiegler, R., Bounded Rationality and Industrial Organization, chapters 2 & 3 Thaler, R., Behavioral Economics: Past, Present, and Future, AER 106 (2016) Ellison, G., Bounded Rationality and IO, in Advances in Economics and Econometrics: Theory and Applications: Ninth World Congress, ed. by R. Blundell, W. Newey, and T. Persson, de Clippel, G., Eliaz, K., and Rozen, K., Competing for Consumer Inattention, JPE, 122 (2014) Zhou, J., Reference Dependence and Market Competition, Jour of Economics and Mgmt Strategy, 20 (2011) Class 10: Vertical Contracting and Mergers * Collard-Wexler, A., G. Gowrisankaran, and R. Lee, Nash-in-Nash Bargaining: A Microfoundation for Applied Work, working paper, 2017; available at, * Inderst, R. and Shaffer, G., Market power, price discrimination, and allocative efficiency in intermediate-goods markets, RAND Jour of Economics 40 (Winter 2009). O Brien, D. and Shaffer, G., Bargaining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers, RAND Jour of Economics 36 (Autumn 2005). Chen, Y. and Riordan, M., Vertical Integration, Exclusive Dealing, and Ex Post Cartelization, RAND Jour of Economics 38 (Spring 2007). Class 11: Horizontal Mergers * Gowrisankaran, G. (1999), A Dynamic Model of Endogenous Horizontal Mergers RAND Journal of Economics 30: Nocke, V. and M. D. Whinston (2010), Dynamic Merger Review Journal of Political Economy 118: Mermelstein, B., V. Nocke, M. Satterthwaite, and M. Whinston, Internal versus external growth in industries with scale economies: A computational model of optimal merger policy, NBER working paper 20051, April 2014; 7

8 Classes 12, 13 & 14: Industrial Dynamics R&D productivity and incentives; Industry dynamics; Dynamic game models; Computation * Doraszelski, U. and Satterthwaite, M., Computable Markov-perfect industry dynamics, The RAND Journal of Economics, 41 (Summer 2010) * Doraszelski, U. and S. Markovich, Advertising Dynamics and Competitive Advantage The RAND Journal of Economics, 38 (2007) * Cullen, J. and S. Reynolds, Market Dynamics and Investment in the Electricity Sector University of Arizona Economics Working Paper (February 2017); Jovanovic, B. and MacDonald, G., The Life Cycle of a Competitive Industry, JPE 102 (April 1994), pp Gowrisankaran, G. and Rysman, M., Dynamics of Consumer Demand for New Durable Goods, Journal of Political Economy 120 (2012) Hopenhayn, H. (1992) Entry, exit, and firm dynamics in long run equilibrium Econometrica, 60(5): B. Jovanovic, Selection and the Evolution of Industry, Econometrica, 1982, , Besanko, D., U. Doraszelski, Y. Kryukov, and M. Satterthwaite, Learning-by-doing, organizational forgetting, and industry dynamics, Econometrica 78, 2 (March 2010) Doraszelski, U. and A. Pakes, A Framework for Applied Dynamic Analysis in IO, Mark Armstrong and Robert Porter (eds.), Handbook, Volume 3, 2007, North-Holland, Amsterdam, pp Farias, V., Saure, D., and Weintraub, G., An approximate dynamic programming approach to solving dynamic oligopoly models, RAND Jour of Economics, 43 2 (Summer 2012) Reynolds, S., "Capacity Investment, Preemption and Commitment in an Infinite Horizon Model" International Economic Review, 28 (1987) Tirole, ch. 10, pp Ericson, R. and Ariel Pakes, Markov Perfect Industry Dynamics: A Framework for Empirical Work, Review of Economic Studies, vol. 62, no. 1, (1995) Pakes, A. and McGuire, P., "Computing Markov-Perfect Nash Equilibria ", RAND Jour of Economics (1994) Reynolds, S., and Isaac, R.M.,"Stochastic Innovation and Product Market Organization", Economic Theory, 2 (1992) 8

9 Classes 15 & 16: Applying IO Methods for Analysis of the Energy Industry Energy market modeling; energy auctions; model-based policy analysis * Borenstein, S. and S. Holland, On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices, RAND Jour of Econ 36 (Autumn 2005) * Gowrisankaran, G. and Reynolds, S. and Samano, M., Intermittency and the Value of Renewable Energy, JPE 124 (August 2016). * Vives, X., Strategic Supply Function Competition with Private Information, Econometrica, 79 6 (November 2011) Pycia, M. and Woodward, K., Pay-as-Bid: Selling Divisible Goods to Uninformed Bidders, working paper, Hortacsu, A. and Puller, S., Understanding strategic bidding in multi-unit auctions: a case study of the Texas electricity spot market RAND Jour of Economics, 39 1 (2008) Fabra, N., von der Fehr, N.H., Harbord, D., Designing electricity auctions, RAND Journal of Economics 37, (2006) Wilson, R., Architecture of Power Markets, Econometrica, 70, 4 (2002) Allaz, B. and J. Vila, Cournot Competition, Forward Markets and Efficiency, Journal of Economic Theory, 59 1 (1993) Newbery, D., Competition, contracts, and entry in the electricity spot market, RAND Journal of Economics, 29 (1998) Klemperer, P. and M. Meyer (1989), Supply Function Equilibria in Oligopoly under Uncertainty, Econometrica, 57, 6, Genc, T. and S. Reynolds, Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers, International Journal of Industrial Organization, 29 (July 2011) Brandts, J., A. Schram and S. Reynolds, Pivotal Suppliers and Market Power in Experimental Supply Function Competition," Economic Journal (Sept 2014) Borenstein, S., J. Bushnell, and F. Wolak,, Measuring Inefficiencies in California s Restructured Electricity Market, AER 92 (2002), pp