Econ 8757: Industrial Organization

Topics in Industrial Organization

May-June 2011

Professor Yongmin Chen

Email:
http://spot.colorado.edu/~cheny/

Course Description: This is a graduate topic course in industrial organization. I plan to cover three broad topics: (1) Vertical contracting; (2) Economics of search; and (3) Innovation and intellectual property rights. The goal is to introduce students to the theoretical developments and policy interests in these areas, with an emphasis on theoretical insights and research methods.

Recommended textbooks include: (1) The Theory of Industrial Organization by Jean Tirole, MIT Press, and (2) Industrial Organization: Contemporary Theory and Practice by Pepall, Richards, and Norman, 4th edition. A good source for references is the Handbook of Industrial Organization, Vol. 1, 2, and 3. HIO3 (2007, Mark Armstrong and Robert Porter edits) surveys the major developments in IO since Tirole. The lectures will be organized around some key articles.

Outline of Course Schedule:

Topic 1 Vertical Contracting

1. The Problem of Vertical Control

2. Resale Price Maintenance (RPM)

3. Contracts as a Barrier to Entry

4. Naked Exclusion

5. Recent Developments

Rquired Readings:

· Aghion, Philippe and Patrick Bolton, "Contracts as a Barrier to Entry," AER, 77(3), 1987.

· Chen, Yongmin, “Oligopoly Price Discrimination and Resale Price Maintenance,” RAND, 30, 441-455, 1999.

· Rasmusen, Eric, J. Mark Ramseyer, and John Wiley, "Naked Exclusion," AER, 1991.

· Segal, Ilya and Michael Whinston, "Naked Exclusion: Comment," AER, 2000.

Additional Readings:

· Fumagalli, Chiara and Massimo Motta, "Exclusive Dealing and Entry when Buyers Compete," AER, 96(3), 2006.

· Greenlee, Patrick, David Reitman, and David Sibley, "An Antitrust Analysis of Bundled Loyalty Discounts," International Journal of Industrial Organization, 2008.

· Segal, Ilya and Michael Whinston, "Naked Exclusion: Comment," AER, 2000.

· Segal, Ilya and Michael Whinston, "Exclusive Contracts and the Protection of Investments," Rand Journal of Economics, 2000.

· Spier, Kathryn and Michael Whinston, "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance and Renegotiation," Rand, 1995.

· Simpson, John and Abraham Wickelgren, "Naked Exclusion, Efficient Breach, and Downstream Competition," AER, 2007.

· Wright, Julian, “Exclusive Dealing and Entry, When Buyers Compete: Comment,” AER, 2009, p. 1070-81.

Topic 2 Economics of Search

1. Price Search in Homogeneous Product markets

(1) Varian’s model of sales

(2) Diamond’s Paradox

(3) Stahl’s model of sequential search

2. Product Search in Differentiated Markets

(1) Wolinsky’s model

(2) Order of Search

Required Readings:

· Diamond, Peter. 1971. "A Model of Price Adjustment." Journal of Economic Theory, 3, 156-168.

· Stahl, Dale O. 1989. "Oligopolistic Pricing with Sequential Consumer Search." AER, 700-712.

· Varian, Hal. 1980. "A Model of Sales." American Economic Review, 70, 651-659

· Wolinsky, A. 1986. “True Monopolistic Competition as a Reslut of Imperfect Competition,” QJE, 101” 493-511.

· Armstrong, M, Vickers, J, and Zhou, J., “Prominence and Consumer Search”, RAND, 2009.

Additional Readings:

· Armstrong, M. and Y. Chen, “Inattentive Consumers and Product Quality,” Journal of the European Economic Association, (2009), pp. 411-422.

· Bagwell, K. and G. Ramey, “Coordination Economies, Advertising, and Search Behavior in Retail Markets”, AER (1994), 498-517.

· Bester, H., “Bargaining, Search Costs and Equilibrium Price Distributions”, RES (1988), 201-214.

· Chen, Y. and T. Zhang, “Equilibrium Price Dispersion with Heterogeneous Searchers,” working paper, revised 2011.

· Reinganum, J., “A simple Model of Equilibrium Price Dispersion”, JPE (1979), pp. 851-858.

· Salop, S. and J. Stiglitz, “Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion”, RES (1977), pp. 493-510.

· Grossman and Shapiro, “Informative Advertising with differentiated products”, RES, 1984, 63-81.

· Chen, Y. and R. Rosenthal, “On the Use of Ceiling-price Commitments by Monopolists”, RAND (1996), 207-220.

· Baye, Michael and John Morgan. 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets." AER, 91, 454-474.

· Baye, M.R. and J. Morgan. 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence." Rand, 35(3), 449-466.

· Burdett, Kenneth and Kenneth L. Judd. 1983. "Equilibrium Price Dispersion." Econometrica, 51, 955-969.

· Janssen, Maarten C. and Jose Luis Moraga-Gonzalez. 2004. "Strategic Pricing, Consumer Search and the Number of Firms." Review of Economics Studies, 71, 1089-1118.

· Reinganum, Jennifer F. 1979. "A simple Model of Equilibrium Price Distribution." Journal of Political Economy, 87, 851-858.

Topic 3. Innovation and Intellectual Property Rights

1. Market Structure and Innovation Incentive

· Arrow’s Analysis (1962): Process Innovation

· Preempting Monopoly: Gilbert and Newbery (1982)

· Product Innovation: Can Arrow’s Ranking Be Reversed?

2. A Model of Vertical Organization and Innovation Incentive

· Formulation

· Upstream Innovation Under Downstream Cournot Competition

· Upstream Innovation Under Downstream Bertrand Competition

· Vertical Integration and Innovation Incentive

3. A Model of Exclusive Contracts and Innovation

· Formulation

· How Exclusive Contracts Affect Unilateral Innovation Incentives

· How Exclusive Contracts Affect Equilibrium Innovation Incentives

· Welfare Analysis

4. Intellectual Property Rights (IPRs) and Innovation

· The Basic Trade-off

· Common Forms of IPRs

· Intellectual Property Rights (IPRs) and Innovation in Developing Countries: Theory and Evidence

I plan to discuss this topic based on the following papers and a book:

· Arrow, K. (1962). "Economic Welfare and the Allocation of Resources for Innovations," R. Nelson ed. The Rate and Direction of Inventive Activity, Princeton University Press.

· Chen, Y and T. Puttitanun (2005). "Intellectual Property Rights and Innovation in Developing Countries”, Journal of Development Economics, 78: 474-493.

· Chen, Y and D. Sappington (2010). “Innovation in Vertically Related Markets”, Journal of Industrial Economics.

· Chen, Y and D. Sappington (2011). “Exclusive Contracts, Innovation, and Welfare”, American Economic Journals: Microeconomics, forthcoming.

· Chen, Y and M. Schwartz (2009). “Product Innovation Incentives: Monopoly vs. Competition”, working paper, available at http://ideas.repec.org/p/geo/guwopa/gueconwpa~09-09-02.html.

· Gilbert, R. and Newbery, D. (1982). "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, 72: 514-526.

· Scotchmer, Suzanne. 2004. Innovation and Incentives. Cambridge: MIT Press.

· Vickers. John. 2010. "Competition Policy and Property Rights." Economic Journal, 120: 375-392.