Graduate Industrial Organization

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1 Department of Economics Class: 784 McMaster University Winter 2017 Graduate Industrial Organization Class location/time: KTH-334 Monday 4:00PM - 6:50PM Instructor: Office: Office hours: Laura Grigolon 441 KTH by appointment laura.grigolon@mcmaster.ca

2 Course Objectives Welcome to 784. This course examines the organization of firms, industries and markets. Industrial Organization (IO) studies the strategic interactions of firms in markets, and their implications for firms profits and consumer welfare. Market power and market structure are key concepts in IO. Market power (or monopoly power) is the ability of a firm, or group of firms, to gain extraordinary profits above those needed to remunerate the inputs. Market structure is a description of the number of firms in the market and of their respective market shares. The course provides analytical concepts for analyzing firm behavior in different market structures. The course has two main goals: 1. introduce micro-economic and game-theoretic tools to understand competition and market power 2. develop an active understanding of econometric analysis of market power and competition. Both goals are illustrated with applications to competition policy and competitive strategy. Upon completion of this course, you will be able to develop and actively understand econometric analysis of market power and competition. You should have a good background in microeconomics and econometrics. Requirements The first, and most important requirement, is that you read the papers before attending class. You will internalize the concepts and models much more clearly if you spend time working with the material before class begins. The second requirement: there will be five intensive problem sets where you will implement the estimators discussed in class. You should also familiarize yourself with the appropriate software packages (Stata, MATLAB) in order to program these exercises. Grading You will be graded on the problem sets listed above. Also, students will be graded based on class participation. There will be no in class exams. You are encouraged to work together by discussing the papers

3 and in implementing the estimators. Course Outline Theoretical models in industrial organization 1. Static models of imperfect competition 2. Cartels 3. Horizontal mergers First homework Empirical industrial organization 1. Market power with homogeneous products a. Measuring market power with unknown cost but known conduct b. Market power and conduct with homogeneous products c. Competitive supply and demand d. Estimating cost parameters and conduct Read: Porter (1983, RAND Journal of Economics), Cartel Stability Second homework 2. Market power with differentiated products a. Representative consumer models b. Discrete choice models Read: Berry (1994, RAND Journal of Economics) Read: Nevo (2000, Journal of Economics & Management Strategy) 3. Market power and market structure a. The supply side b. Relevant market definition c. Inter-industry analysis: merger simulation and new product introduction d. Inter-industry analysis e. Entry games with homogeneous firms f. Entry games with heterogeneous firms

4 Read: Nevo (2001, Econometrica), Cereal Read: Bresnahan and Reiss (1991, JPE) Third and Fourth homework 4. Productivity a. The production function approach to measuring market power b. Estimation of production function: Introduction c. Simultaneity Problem d. Panel data approach e. Control function approach f. Endogenous exit Read Olley Pakes (1996, Econometrica) Fifth homework

5 Evaluation Final grades will be based on: 1. Five homework assignments (19% each) 2. Class and discussion participation (5%)

6 Reading List 1. Market power with homogeneous products Reiss, P. and F. Wolak Structural Econometric Modeling: Rationales and Examples from Industrial Organization. in Handbook of Econometrics, Chapter 64 Volume 6A (2007). Domowitz I., R. Glenn Hubbard and B. Petersen. Business Cycles and the Relationship between Concentration and Price-Cost Margins. The RAND Journal of Economics, Vol. 17, No. 1 (Spring, 1986): Bresnahan, T. The Oligopoly Solution Concept is identified. Economics Letters 10 (1982): Porter, R. A Study of Cartel Stability: The Joint Economic Committee, Bell Journal of Economics 14 (Autumn 1983): Market power with differentiated products Joris Pinkse & Margaret E. Slade & Craig Brett, Spatial Price Competition: A Semiparametric Approach. Econometrica, Econometric Society, vol. 70(3), pages , May. Jerry Hausman, Gregory Leonard and J. Douglas Zona, Competitive Analysis with Differentiated Products. Annals of Economics and Statistics / Annales d Économie et de Statistique, No. 34, Économétrie de la concurrence imparfaite Econometrics of Imperfect Competition, pp Steven T. Berry, Estimating Discrete-Choice Models of Product Differentiation. RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages , Summer. Berry, Steven & Levinsohn, James & Pakes, Ariel, Automobile Prices in Market Equilibrium. Econometrica, Econometric Society, vol. 63(4), pages , July. Steven Berry & James Levinsohn & Ariel Pakes, Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market. Journal of Political Economy, University of Chicago Press, vol. 112(1), pages , February. * Kenneth Train. Discrete Choice Methods with Simulation. Aviv Nevo, A Practitioner s Guide to Estimation of Random-Coefficients Logit Models of Demand. Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages , December. Björnerstedt, Jonas & Verboven, Frank, Does Merger Simulation Work? A Natural Experiment in the Swedish Analgesics Market Market. CEPR Discussion Papers 9027, C.E.P.R. Discussion Papers. Grigolon, Laura & Verboven, Frank, forthcoming. Nested logit or random coefficients logit? A comparison of alternative discrete choice models of product differentiation. The Review of Economics and Statistics.

7 Frank Verboven, International Price Discrimination in the European Car Market. RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages , Summer. 3. Market power and market structure Lexecon (2005) An Introduction to Quantitative Techniques in Competition Analysis Michael L. Katz and Carl Shapiro Critical Loss: Let s Tell the Whole Story. Antitrust Spring Mélisande Cardona & Anton Schwarz & B. Yurtoglu & Christine Zulehner, Demand estimation and market definition for broadband Internet services. Journal of Regulatory Economics, Springer, vol. 35(1), pages 70-95, February. Hayes, Shapiro and Town, 2007, Market definition in crude oil: Estimating the effects of the BP/ARCO merger, The Antitrust Bulletin, 52(2), Van Reenen, John (2004) Is there a market for workgroup servers?, Centre for Economic Performance Discussion Paper No.650. Randy Brenkers and Frank Verboven Market Definition with Differentiated Products - Lessons from the Car Market, in Jay Pil Choi (ed.) Recent Developments in Antitrust: Theory and Evidence, MIT Press. Farrell, Joseph & Shapiro, Carl, Horizontal Mergers: An Equilibrium Analysis. American Economic Review, American Economic Association, vol. 80(1), pages , March. Lars-Hendrik Röller & Johan Stennek & Frank Verboven, Efficiency Gains from Mergers. Gregory J. Werden A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products The Journal of Industrial Economics, Vol. 44, No. 4 (Dec., 1996), pp Joseph Farrell and Carl Shapiro (2010) Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition, The B.E. Journal of Theoretical Economics: Vol. 10: Iss. 1. Ivaldi, Marc & Verboven, Frank, Quantifying the effects from horizontal mergers in European competition policy, International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages , December. Aviv Nevo, Mergers with Differentiated Products: The Case of the Ready- to-eat Cereal Industry, RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages , Autumn. Peters, Craig, Evaluating the Performance of Merger Simulation: Evidence from the U.S.

8 Orley Ashenfelter & David Ashmore & Jonathan Baker & Suzanne Gleason & Daniel Hosken, Empirical Methods in Merger Analysis: Econometric Analysis of Pricing in FTC v. Staples, International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages John Sutton Sunk costs and market structure MIT Press, London, Paul B. Ellickson 2007 Does Sutton Apply to Supermarkets? The RAND Journal of Economics 38, Mankiw, N.G., and M.D. Whinston (1986) Free Entry and Social Inefficiency The RAND Journal of Economics 17, Steven Berry and Joel Waldfogel, Product quality and market size, Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 1-31, 03. Bresnahan, T.F., and P.C. Reiss, Entry and Competition in Concentrated Markets, Journal of Political Economy, 1991, 99 (5). Berry, S.T., Estimation of a Model of Entry in the Airline Industry, Econometrica, 1992, 60 (4). Berry, Steven & Reiss, Peter, Empirical Models of Entry and Market Structure, Handbook of Industrial Organization, Elsevier. 4. Productivity Olley, G Steven & Pakes, Ariel, The Dynamics of Productivity in the Telecommunications Equipment Industry Econometrica, Econometric Society, vol. 64(6), pages , November. James Levinsohn & Amil Petrin, Estimating Production Functions Using Inputs to Control for Unobservables, Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages , 04. Ackerberg, D., Caves, K., and Frazer, G Structural Identification of Production Functions, Working paper. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, Econometric Tools for Analyzing Market Outcomes, Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63 Elsevier.

9 Course modification warning The instructor and university reserve the right to modify elements of the course during the term. The university may change the dates and deadlines for any or all courses in extreme circumstances. If either type of modification becomes necessary, reasonable notice and communication with the students will be given with explanation and the opportunity to comment on changes. It is the responsibility of the student to check his/her McMaster and course websites weekly during the term and to note any changes. Academic dishonesty Academic dishonesty consists of misrepresentation by deception or by other fraudulent means and can result in serious consequences, e.g. the grade of zero on an assignment, loss of credit with a notation on the transcript (notation reads: "Grade of F assigned for academic dishonesty"), and/or suspension or expulsion from the university. It is your responsibility to understand what constitutes academic dishonesty. For information on the various kinds of academic dishonesty please refer to the Academic Integrity Policy, specifically Appendix 3, located at FACULTY OF SOCIAL SCIENCES COMMUNCATION POLICY Effective September 1, 2010, it is the policy of the Faculty of Social Sciences that all communication sent from students to instructors (including TAs), and from students to staff, must originate from the student s own McMaster University account. This policy protects confidentiality and confirms the identity of the student. It is the student s responsibility to ensure that communication is sent to the university from a McMaster account. If an instructor becomes aware that a communication has come from an alternate address, the instructor may not reply at his or her discretion. Forwarding in MUGSI:

Econ Empirical Industrial Organization

Econ Empirical Industrial Organization Econ 737 - Empirical Industrial Organization Laura Lasio Winter 2019 Lectures: Thursday, 4.05-6.55 pm, L424 Office hours: on appointment, L538 COURSE SUMMARY The objective of the course is to introduce