Industrial Organization: Contemporary Theory and Empirical Applications / Edition 4

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The bestselling textbook, Industrial Organization, now in its fourth edition, uniquely uses the tools of game theory, information economics, contracting issues, practical examples, and optional econometric appendices to examine all facets of industrial organization and to enhance students' understanding of the strategic behavior of firms, the structure of markets, and imperfect competition. A new series of appendices that comprehensively explore relevant econometric issues will provide a more challenging and relevant option for instructors and students.
  • Provides a comprehensive guide to industrial organization in the imperfect market conditions of the real world
  • Includes coverage of the latest cutting edge research and public policy developments
  • Features stronger coverage of information economics, contracting issues and game theory than other textbooks
  • Instructor materials will be available. Visit for more information
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Editorial Reviews

From the Publisher
“This edition represents a massive rewriting and reorganization for which the authors should be commended. They have taken an already fine book and made it, I think, considerably better. It is, in short, the best industrial organization text for its level.”
John Kwoka, Northeastern University

“I congratulate the authors on a job well done. The coverage of topics is complete and up to date, with many detailed examples that make these topics real to students.”
Jill McCluskey, Washington State University

“This book strikes the perfect balance between real-world motivation of the various economic phenomena and exposition of formal economic models. This aspect, together with the exercises and complementary online material, has made it my preferred textbook for the undergraduate course.”
Christos Genakos, Selwyn College

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Product Details

  • ISBN-13: 9781405176323
  • Publisher: Wiley
  • Publication date: 1/18/2008
  • Edition description: Older Edition
  • Edition number: 4
  • Pages: 736
  • Product dimensions: 7.10 (w) x 10.05 (h) x 1.44 (d)

Meet the Author

Lynne Pepall is Professor of Economics and Dean of the Graduate School of Arts and Sciences at Tufts University. Professor Pepall received her undergraduate degree in mathematics and economics from Trinity College, University of Toronto, and her Ph.D. in economics from Cambridge University in England. She has written numerous papers in industrial organization, appearing in the Journal of Industrial Economics, International Journal of Industrial Organization, Journal of Economics and Management Strategy, Economic Journal, Canadian Journal of Economics, Economica, and the American Journal of Agricultural Economics. She has taught industrial organization and microeconomics at both the graduate and undergraduate levels, at Tufts University since 1987. Professor Pepall lives in Newton, Massachusetts, with her two sons, a dog, three rabbits, and her husband, a co-author of this book.

Dan Richards is Professor of Economics at Tufts University. Professor Richards received his A.B. in economics and history from Oberlin College and his Ph.D. in economics from Yale University. Professor Richards has written numerous articles in both macroeconomics and industrial organization, appearing in the American Economic Review, Quarterly Journal of Economics, Journal of Industrial Economics, Economica, the B. E. Journals in Economic Analysis and Policy, Canadian Journal of Economics, the Journal of Money, Credit, and Banking, and the American Journal of Agricultural Economics. He came to Tufts in 1985 and has taught at both the graduate and undergraduate levels. He served as Director of the Graduate Program in Economics from 1989 through 1998, and has also served as a consultant to the Federal Trade Commission. From 1996 to 2005 he taught in the Sloan Fellows Program at MIT’s Sloan School of Management. Professor Richards lives in Newton, Massachusetts, with his two sons, a dog, three rabbits, and his wife, a co-author of this book.

George Norman holds the William and Joyce Cummings Family Chair of Entrepreneurship and Business Economics at Tufts University. He came to Tufts in 1995 from Edinburgh University, where he had served as head of the department of economics. Prior to that, Professor Norman was the Tyler Professor of Economics at the University of Leicester (England). Professor Norman attended the University of Dundee (Scotland) where he was awarded the M.A. in economics with first class honors. He received his Ph.D. in economics from Cambridge University. His more than 70 published articles have appeared in such professional journals as the American Economic Review, Review of Economic Studies, Quarterly Journal of Economics, Journal of Industrial Economics, and International Journal of Industrial Organization. He is currently an Associate Editor for two journals, the Bulletin of Economic Research and Regional Science and Urban Economics. He is also on the editorial board of the B.E. Journals in Economic Analysis and Policy. In addition to this book, Professor Norman has written and edited, either alone or in collaboration with others, 17 other books. Professor Norman has taught courses in industrial organization and microeconomic theory at both the graduate and undergraduate levels. He has also taught introductory economics, corporate strategy, international economics, and entrepreneurship. Professor Norman lives in Newbury, Massachusetts, with his wife Margaret who, while not a co-author, has provided invaluable support and assistance in his work on this book.

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Table of Contents

List of Figures.

List of Tables.

About the Authors.

Preface to the Fourth Edition.

Part I: Foundations:.

1. Industrial Organization: What, How, and Why?.

1.1 What Is Industrial Organization?.

1.2 How We Study Industrial Organization.

1.3 Why? Antitrust and Industrial Organization Theory.




Appendix: Excerpts from Key Antitrust Statutes.

2. Basic Microeconomics.

2.1 Competition versus Monopoly: The Poles of Market Performance.

2.2 Profit Today versus Profit Tomorrow: Firm Decision-making over Time.

2.3 Efficiency, Surplus, and Size Relative to the Market.




3. Market Structure and Market Power.

3.1 Measuring Market Structure.

3.2 Measuring Market Power.

3.3 Empirical Application: Monopoly Power-How Bad Is It?.




4. Technology and Cost.

4.1 Production Technology and Cost Functions for the Single Product Firm.

4.2 Sunk Cost and Market Structure.

4.3 Costs and Multiproduct Firms.

4.4 Noncost Determinants of Industry Structure.

4.5 Empirical Application: Cost Function Estimation-Scale and Scope Economies.




Part II: Monopoly Power in Theory and Practice:.

5. Price Discrimination and Monopoly: Linear Pricing.

5.1 Feasibility of Price Discrimination.

5.2 Third-degree Price Discrimination or Group Pricing.

5.3 Implementing Third-degree Price Discrimination or Group Pricing.

5.4 Product Variety and Third-degree Price Discrimination or Group Pricing.

5.5 Third-degree Price Discrimination or Group Pricing and Social Welfare.




6. Price Discrimination and Monopoly: Non-linear Pricing.

6.1 First-degree Price Discrimination or Personalized Pricing.

6.2 Second-degree Price Discrimination or Menu Pricing.

6.3 Social Welfare with First- and Second-degree Price Discrimination.




7. Product Variety and Quality Under Monopoly.

7.1 A Spatial Approach to Horizontal Product Differentiation.

7.2 Monopoly and Horizontal Differentiation.

7.3 Is There Too Much Product Variety?.

7.4 Monopoly and Horizontal Differentiation with Price Discrimination.

7.5 Vertical Product Differentiation.

7.6 Empirical Application: Price Discrimination, Product Variety, and Monopoly versus Competition.




Appendix A: Location Choice with Two Shops.

Appendix B: The Monopolist’s Choice of Price When Her Shops Have Different Costs.

8. Commodity Bundling and Tie-in Sales.

8.1 Commodity Bundling and Price Discrimination.

8.2 Required Tie-in Sales.

8.3 Complementary Goods, Network Externalities, and Monopoly Pricing.

8.4 Antitrust, Bundling, and Tie-in Sales.




Appendix: Formal Proof of the Inefficiency Induced by the Marketing of Complementary Goods by Separate Monopolists.

Part III: Oligopoly and Strategic Interaction:.

9. Static Games and Cournot Competition.

9.1 Strategic Interaction: Introduction to Game Theory.

9.2 Dominant and Dominated Strategies.

9.3 Nash Equilibrium as a Solution Concept.

9.4 Static Models of Oligopoly: The Cournot Model.

9.5 Variations on the Cournot Theme: Many Firms and Different Costs.

9.6 Concentration and Profitability in the Cournot Model.




10. Price Competition.

10.1 The Bertrand Duopoly Model.

10.2 Bertrand Reconsidered.

10.3 Bertrand in a Spatial Setting.

10.4 Strategic Complements and Substitutes.

10.5 Empirical Application: Brand Competition and Consumer Preferences-Evidence from the California Retail Gasoline Market.




11. Dynamic Games and First and Second Movers.

11.1 The Stackelberg Model of Quantity Competition.

11.2 Sequential Price Competition.

11.3 Credibility of Threats and Nash Equilibria for Dynamic Games.

11.4 The Chain Store Paradox.




Part IV: Anticompetitive Strategies:.

12. Limit Pricing and Entry Deterrence.

12.1 Monopoly Power and Market Structure Over Time: Some Basic Facts.

12.2 Predatory Conduct and Limit Pricing.

12.3 Preemption and the Persistence of Monopoly.

12.4 Evidence on Predatory Capacity Expansion.




13. Predatory Conduct: More Recent Developments.

13.1 Predatory Pricing: Myth or Reality?.

13.2 Predation and Imperfect Information.

13.3 Contracts as a Barrier to Entry.

13.4 Predatory Conduct and Public Policy.

13.5 Empirical Application: Entry Deterrence in the Pharmaceutical Industry.




14. Price Fixing and Repeated Games.

14.1 The Cartel’s Dilemma.

14.2 Repeated Games.

14.3 Collusion: The Role of the Antitrust Authorities.

14.4 Empirical Application: Estimating the Effects of Price Fixing.




15. Collusion: Detection and Public Policy.

15.1 The Cartel Problem.

15.2 Factors that Facilitate Collusion.

15.3 An Illustration: Collusion on the NASDAQ Exchange.

15.4 Detecting Collusion among Firms.

15.5 Cartel Leniency (Amnesty) Programs.

15.6 Empirical Application: Experimental Investigation of Leniency Programs.




Part V: Contractual Relations between Firms:.

16. Horizontal Mergers.

16.1 Horizontal Mergers and the Merger Paradox.

16.2 Mergers and Cost Synergies.

16.3 The Merged Firm as a Stackelberg Leader.

16.4 Horizontal Mergers and Product Differentiation.

16.5 Public Policy toward Horizontal Mergers.

16.6 Empirical Application: Evaluating the Impact of Mergers with Computer Simulation.




Appendix A: Bertrand Competition in a Simple Linear Demand System.

Appendix B: Equilibrium Prices in the Spatial Model without a Merger.

Appendix C: Equilibrium Prices in the Spatial Model after Firm 1 and Firm 2 Merge.

17. Vertical and Conglomerate Mergers.

17.1 Procompetitive Vertical Mergers.

17.2 Possible Anticompetitive Effects of Vertical Mergers.

17.3 Formal Oligopoly Models of Vertical Integration.

17.4 Conglomerate Mergers.

17.5 A Brief Digression on Mergers and the Theory of the Firm.

17.6 Empirical Application: Vertical Integration in the Ready-mixed Concrete Industry.




18. Vertical Price Restraints.

18.1 Resale Price Maintenance: Some Historical Background.

18.2 Vertical Price Restraints as a Response to Double Marginalization.

18.3 RPM Agreements and Retail Price Discrimination.

18.4 RPM Agreements to Ensure the Provision of Retail Services.

18.5 Retail Price Maintenance and Uncertain Demand.




Appendix: Manufacturer’s Optimal Wholesale Price When Retailer Discriminates between Two Markets.

19. Nonprice Vertical Restraints.

19.1 Upstream Competition and Exclusive Dealing.

19.2 Exclusive Selling and Territorial Arrangements.

19.3 Aftermarkets.

19.4 Public Policy toward Vertical Restraints.

19.5 A Brief Discussion of Franchising and Divisionalization.

19.6 Empirical Application: Exclusive Dealing in the U.S. Beer Industry.




Part VI: Nonprice Competition:.

20. Advertising, Market Power, and Information.

20.1 The Extent of Advertising.

20.2 Advertising, Product Differentiation, and Monopoly Power.

20.3 The Monopoly Firm’s Profit-maximizing Level of Advertising.

20.4 Advertising as Consumer Information.

20.5 Persuasive Advertising.

20.6 Advertising and Signaling.

20.7 Suppressed Advertising Content.

20.8 Truth versus Fraud in Advertising.




21. Advertising, Competition, and Brand Names.

21.1 Advertising as Wasteful Competition.

21.2 Advertising and Information in Product-differentiated Markets.

21.3 What’s in a Brand Name?.

21.4 Too Much or Too Little Advertising: The Question Revisited.

21.5 Cooperative Advertising.

21.6 Empirical Application: Advertising, Information, and Prestige.




22. Research and Development.

22.1 A Taxonomy of Innovations.

22.2 Market Structure and the Incentive to Innovate.

22.3 A More Complete Model of Competition via Innovation.

22.4 Evidence on the Schumpeterian Hypothesis.

22.5 R&D Cooperation between Firms.

22.6 Empirical Application: R&D Spillovers in Practice.




23. Patents and Patent Policy.

23.1 Optimal Patent Length.

23.2 Optimal Patent Breadth.

23.3 Patent Races.

23.4 Monopoly Power and “Sleeping Patents”.

23.5 Patent Licensing.

23.6 Recent Patent Policy Developments.

23.7 Empirical Application: Patent Law and Practice in the Semiconductor Industry.




Part VII: Networks and Auctions:.

24. Network Issues.

24.1 Monopoly Provision of a Network Service.

24.2 Networks, Competition, and Complementary Services.

24.3 Systems Competition and the Battle over Industry Standards.

24.4 Network Goods and Public Policy.

24.5 Empirical Application: Network Externalities in Computer Software-Spreadsheets.




25. Auctions and Auction Markets.

25.1 A Brief Taxonomy of Auctions.

25.2 The Revenue Equivalence Theorem.

25.3 Common Value Auctions.

25.4 Auction Design: Lessons From Industrial Organization.




Answers to Practice Problems.


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