Industrial Organization

EC 105 (Winter 2007-08)

Instructor: Matias Iaryczower.
Class meets Tuesdays and Thursdays at 2:30 pm, 315 Baxter.

Contact Information

Office Hours: Thursdays from 4:00 pm to 5:30 pm or by appointment.
Office: 312 Baxter
Email: miaryc@hss.caltech.edu
Phone: (626) 395-4061
TA: Marjan Praljak (mpraljak@hss.caltech.edu; 8a Baxter; x4052)
Secretary: Victoria Mason (victoria@hss.caltech.edu;  301 Baxter;  x3831)

Overview

This course is mainly concerned with the causes and consequences of market power. Major topics include Price Discrimination, Short Run Price Competition in Oligopolies, Dynamic Price Competition and Tacit Collusion, Product Differentiation, Vertical Control and Entry Deterrence. We will also cover basic elements of the Theory of the Firm (Principal-Agent Theory, Incentives in Teams). Although we will make heavy use of Game Theory throughout the course, no prior knowledge of Game Theory will be assumed. For this reason, some of the lectures will be devoted to developing these tools.

About This Website

This is the website for the course (www.hss.caltech.edu/~miaryc/EC105_W08/EC105_W08.html). I will post here copies of assignments, selected sample answers, class slides and links to online copies of selected articles. I will announce major postings in lectures, but you may want to check this site on a regular basis.

Texts

The main textbook for the course is: The Theory of Industrial Organization. MIT Press 1988, by Jean Tirole. An alternative text for most of the topics covered is: Industrial Organization. Theory and Applications. MIT Press 1995,  by Oz Shy. A complement to the introduction to Game Theory offered in both these texts is Game Theory for Applied Economists. Princeton University Press 1992, by Robert Gibbons.
 
Another useful complementary references for some of the material covered in the course are Microeconomic Theory. Oxford University Press 1995, by Andreu Mas-Colell, Michael Whinston and Jerry Green (MWG), and Introduction to Economic Analysis, by Preston McAfee (download at http://www.introecon.com/). For a more in depth coverage of Game Theory, I recommend either Game Theory. Analysis of Conflict. Harvard  University Press 1991, by Roger Myerson, or Game Theory. The MIT Press 1998, by Drew Fudenberg and Jean Tirole. For Auctions, see Auction Theory, Academic Press 2002, by Vijay Krishna.

Schedule

The following schedule should be regarded as tentative and subject to revision.


Day        
Lecture
 		 Readings             
Assignment 

Jan. 8
 		[Lecture 1. Intro & Review]. Technology and Costs. Cost Minimization Problem. Profit Maximization Problem. Competitive Markets. The Basic Model of Monopoly. Welfare and Dead Weight Loss.
- MWG Ch. 5
- Tirole Ch. 1
Jan. 10
 		[Lecture 2. Monopoly Pricing]. Multiproduct Monopolist. 1st and 3rd Degree Price Discrimination. Two part Tariffs, Tie-in Sales.  Durable good monopolist. - Tirole Chs. 1 and 3
Jan. 15
 		[Lecture 2. Monopoly Pricing]. Multiproduct Monopolist. 1st and 3rd Degree Price Discrimination. Two part Tariffs, Tie-in Sales.  Durable good monopolist. - Tirole Chs. 1 and 3 PS1: [Tirole (1.1), (1.10), (3.2),(3.4), (3.5)] Due Jan 22.
Suggested Answer by Marjan Praljak
Jan. 17
 		[Lecture 3. Static Games of Complete Information]. Strategic Form Representation. Dominance. Iterative Deletion of Dominated Strategies. Nash Equilibrium. Mixed Strategies.
- Tirole Ch.11
- Gibbons Ch.1
Jan. 22
 		[Lecture 4.a. The Basic Theory of Oligopolistic Competition] The Models of Cournot and Bertrand. - Tirole Ch. 5
Jan. 24
 		 [Lecture 4.b. Dynamic Games]. Dynamic Games of Complete Information. Commitment and the Stackelberg-Spence-Dixit Model.
- Gibbons Ch. 2
- Tirole Chs. 5 and 8 		PS2: [Tirole (5.1), (5.3), (5.4),(5.5), (5.7)] Due Feb 1 (5pm or ealier in my office, Baxter 312).
Suggested Answer by Laura Panattoni
Jan. 29
 		[Lecture 4c. Differentiated Products. Price Dispersion for Homogeneous Products] Spatial Competition.  Pricing,  Location and Entry.  Search and Price Dispersion. - Tirole Ch. 7
- McAfee Ch. 7 (Search)
Jan. 31
 		[Lecture 4c. Differentiated Products. Price Dispersion for Homogeneous Products] Spatial Competition.  Pricing,  Location and Entry.  Search and Price Dispersion.

 		- Tirole Ch. 7
- McAfee Ch. 7 (Search)
Feb. 5
 		 [Lecture 4.d. Dynamic Price Competition and Tacit Colusion]. Repeated Games. Basic Models of Dynamic Price Competition and Tacit Colusion.
- Tirole Ch. 6
Feb. 7
 		Midterm Examination (due February 12, 2008 at 2:30 pm in Baxter 315)

Suggested Answer by Jihong Lee
Feb. 12
 		We will finish with "Search and Price Dispersion" and "Secret Price Cuts" in Repeated Games. Then we'll start with

[Lecture 5.a. Vertical Control]. Vertical Externalities (Double Marginalization, Downstream Moral Hazard) and Vertical Restraints (Exclusive Territories, Tie-In, Resale Price Maintenance, etc.).
- Tirole Ch. 4
  
PS3: [Tirole (7.1), (7.2),(8.4),(6.4),(6.6)]
Due Feb. 19 Suggested Answer by Laura Panattoni
Feb. 14
 		[Lecture 5.a. Vertical Control]. Vertical Externalities (Double Marginalization, Downstream Moral Hazard) and Vertical Restraints (Exclusive Territories, Tie-In, Resale Price Maintenance, etc.).

- Tirole Ch. 4
Feb. 19
 		[Lecture 5.b. Entry, Accommodation and Exit]. Competition for the Monopoly Position: Contestability and War of Attrition. The Stackelberg-Spence-Dixit Model revisited.
- Tirole Ch. 8 		PS4: [Tirole (4.1), (4.2), (4.5), (8.2), (8.9)] Due Feb. 28 Suggested Answer by Laura Panattoni
Feb. 21
 		[Lecture 5.b. Entry, Accommodation and Exit].

(cont.)
- Tirole Ch. 8
Feb. 26
 		[Lecture 5.c. Games of Incomplete Information] Static Games of Incomplete Information. Dynamic Games of Incomplete Information
- Tirole Ch. 11


Feb. 28
 		[Lecture 5.d. Reputation, Limit Pricing and Predation]  Static Price Competition under Asymmetric Information. The Milgrom-Roberts model of Limit Pricing. Predation for Merger. Multimarket Reputation.
- Tirole Ch. 9 		PS5: [Tirole (3.7),(11.12)]
Due Mar. 11
Suggested Answer by Laura Panattoni
Mar. 4
[Lecture 6. Price Discrimination Revisited]. Fully Non-linear Tarifs and Quantity Discrimination. Quality Discrimination.
- Tirole Ch. 3
Mar. 6
 		[Lecture 7.a. The Principal Agent Model] Moral Hazard

 		- Tirole Ch. 2 (Appendix)
- MWG  Ch. 14
Mar. 11
 		[Lecture 7.b. The Principal Agent Model] Adverse Selection

 		- Tirole Ch. 2 (Appendix)
- MWG  Ch. 14
Mar. 14
 		Final Examination (due March 18, 2008 at 5pm in Baxter 312).



Course Policies

Grades are based on the following weighting scheme: Problem Sets (40%), Midterm  (20%), Final  (40%). Attendance and participation are required. Midterm and Final examinations will be of the closed-book type, and due at the time and place specified on the exam. Collaboration on the examinations is prohibited. Students can work together on the problem sets - and indeed are encouraged to do so - but the final solutions must be written independently. Specifically, students should not divide the task of doing a problem set and copy the rest from other students' papers; each student should participate fully in solving each problem and understand the answer. Late assignments will not be accepted, unless approved by the Dean of Students. The date that an assignment is due will be announced in lecture when the assignment is distributed (and posted on this page after that).  Assignments will be due in class at the start of the lecture on the day they are due. If there is any ambiguity in these policies,  it is your responsibility to get clarification from me.