econs 425 - introduction / history of industrial organization

EconS 425 - Introduction / History of IndustrialOrganization

Eric Dunaway

Washington State University

[email protected]

Industrial Organization

Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 26

Welcome!

Welcome to EconS 425 - Industrial Organization

I�m Eric

4th year Ph.D. Student.My Research is on Industrial Organization and Game Theory.Current paper: Strategic Campaign Finance.


Introductions

Who are you?

Name.Major (If not Econ).Plans for next year.Favorite Pokémon.


Why Study I/O?

Why should you be interested in Industrial Organization?


Why Study I/O?

The perfectly competitive market has severe limitations, in both itsscope and its applicability to the real world.

How many markets in the real world do you think are perfectlycompetitive?

Most markets utilize some form of market power, where one or moreagents�decisions in�uence the equilibrium price.


Why Study I/O?

Our goal with Industrial Organization is to �ll in the gap between thetheory of the perfectly competitive market and reality.

We do this by creating several forms of imperfect competition:monopoly, oligopoly, mergers, product di¤erentiation, integration, etc.

Remember that even like the perfectly competitive market, what youlearn in this class is still theory, i.e., it�s an approximation of reality.

Industrial organization creates a more accurate approximation, however.


Learning Objectives

What you will learn in this class:

Several forms of imperfect competition.Cost structures, and how they in�uence the relationship betweensuppliers and producers.Di¤erentiating products based on tastes and quality.E¢ cient mergers between �rms.Advertising and Research & Development.Network E¤ects.And more!


Learning Objectives

What you will not learn in this class:

How to corner the stock market.How to manage your grandparent�s investment portfolio.Why our football team always seems to lose the �rst two games of theseason.Who Rey�s parents are.


Book

Contemporary Industrial Organization: A Quantitative Approach

By Lynne Pepall, Dan Richards, and George Norman.ISBN: 978-0-470-59180-2

It�s pretty easy to read, but it also presents some very advanced math.

Come to me with questions about it, I am happy to explain what isgoing on.


Lectures

Monday and Wednesday - 3:10-4:00 PM.

Friday - 2:10-3:00 PM

Why earlier? The department holds a research seminar every Friday at3:00 PM. You are all welcome to join us, but attendance is notrequired.

I will post lecture slides on Blackboard before class.

Sometimes the night before, sometimes the hour before.Feel free to print them out and annotate them in class.


Grading

Bi-weekly problem sets: 25%

3 Quizzes: 15%

Midterm: 30%

March 3rd, 2017

Final: 30%

May 4th, 2017 from 3:10-5:10 PMThe Final is not cumulative.


Grade Scale

A few guarantees:

>90% - A>80% - B>70% - C>60% - Pass

Everything else is up to my discretion.

Also, I reserve the right to raise anyone�s grade for whatever reason Imay have.


Homework

I assign a homework problem at the end of (almost) every lecture.

They are designed to take 10-20 minutes to solve.

At the end of every other week, I will collect one of the homeworkproblems at random and grade it.

Homework is due the moment I call for its submission.No late homework is accepted.See the syllabus for more details.


Expectations

My expectations:

Enhance your modelling and quantitative skills.Develop strong explanatory and intuitive understanding of thesemodels.Be a high quality human being.


Resources

I do a lot of work with the Global Campus

I�ll be turning this class into an online version this summer.

That being said, I have access to a lot of resources that may be useful.

The lightboard is your friend.


Questions

Any Questions?


History of I/O

Let�s spend the rest of this day talking about how industrialorganization came to be.

This is basically a summary of Chapter 1 of your textbook.

Modern economics was born in 1776 when Adam Smith published hismasterpiece, An Inquiry into the Nature and Causes of the Wealth ofNations.

He described the perfectly competitive market, invisible hand, andbasically set the foundation for all of what we do today.


History of I/O

Smith also predicted market power. A quote from Wealth of Nations:

"People of the same trade seldom meet together, even for merriment ordiversion, but the conversation ends in a conspiracy against the public,or in some contrivance to raise prices.""The monopolists, by keeping the market constantly understocked, bynever fully supplying the e¤ectual demand, sell their comodoties muchabove the natural prices..."


History of I/O

People generally had faith in the perfectly competitive market.

Market power was mostly ignored until almost the 20th century.

The Sherman Act, passed in 1890, was the USA�s �rst antitrust act.It aimed to reduce collusion and the formation of monopolies.

However, there wasn�t any scienti�c basis to detect anticompetitivebehaviors.

Almost no economic research had focused on these concepts in a waythat could be presented to the courts.


History of I/O

In 1929, the Great Depression changed everything.

For the �rst time, there was hard evidence that there existed problemswith the perfectly competitive market.

Before this, there was simply the study of economics; afterward, thedisciplines of microeconomics and macroeconomics split into theirseparate �elds.

The drive to explain imperfect competition came soon afterwards.


SCP Approach

The �rst successes came in 1933 and 1939, when Chamberlin andMason developed the Structure-Conduct-Performance (SCP)approach to measure the impact of �rms with large market shares onthe public.

This approach contained empirical techniques that were measurable.

Finally, the courts had something to work with.

Several trusts were broken up, including Alcoa, the three largesttobacco �rms, and the Grinnel Corporation.They seemed to suggest that if a �rm was large enough, its impact ona market was surely detrimental.


The Chicago School

An alternative approach was presented in the 1970s by economistsPosner, Bork, and Peltzman at the University of Chicago.

They showed that the larger �rms could exist because they have betterinternal cost structures.Perhaps the creation of that �rm was a natural process?This casted doubt on the SCP approach�s credibility, and shifted thefocus to the cost structure of �rms, rather than their size relative tothe market.

Admittedly, SCP had several �aws.


Post Chicago

In the 1990s, the industrial organization paradigm shifted again withthe development of game theory by Von Neumann, Morgenstein, andNash.

Their work suggested that people and �rms behave strategically, andhow they are reacting to other agents plays a role in their decisionmaking.This opened up numerous models for analysis and testing.

Almost all industrial organization research since then has focused onthe game theoretic behavior of those involved.


Summary

Industrial Organization is a relatively young �eld in economics, but itdoes a great job of approximating reality.

It has gone through several periods in the last century, and still has alot of room to grow.

We�ll be looking at where it has been, and where it�s going.


Next Time

Review of the perfectly competitive and monopoly market structures.

Reading: Section 2.1


Assignment 1-1

Log into Blackboard and introduce yourself again on the discussionforums. Provide the following information:

NamePreferred email addressMajorAreas of interest (either academic or career interests are �ne)Are you interested in a project for this class? If so, then what wouldyou like to do?What kind of online resources would you like to see?


econs 425 - introduction / history of industrial organization

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