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TRANSCRIPT
Modern Industrial OrganizationFOurth edItIOn
Dennis W. Carlton • Jeffrey M. Perloff
Modern Industrial O
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This is a special edition of an established title widely used by colleges and universities throughout the world. Pearson published this exclusive edition for the benefit of students outside the United States and Canada. If you purchased this book within the United States or Canada you should be aware that it has been imported without the approval of the Publisher or Author.
Pearson Global Edition
GlObal edItIOn
For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools. This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version.
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Modern Industrial Organization PDFeBook, Global Edition
Table of Contents
Cover
Title
Copyright
Brief Contents
Contents
Preface
PART 1 Introduction and TheoryCHAPTER 1 Overview
Models
Price Theory
Transaction Costs
Game Theory
Contestable Markets
Organization
Basic Theory
Market Structures
Business Practices: Strategies and Conduct
Information, Advertising, and Disclosure
Dynamic Models and Market Clearing
Government Policies and Their Effects
CHAPTER 2 The Firm and CostsThe Firm
The Objective of a Firm
Ownership and Control
Mergers and Acquisitions
Reasons for Mergers and Acquisitions
Merger Activity in the United States
Merger Activities in Other Countries
Empirical Evidence on the Efficiency and Profitability of Mergers
Cost Concepts
Types of Costs
Cost Concepts
Economies of Scale
Reasons for Economies of Scale
Total Costs Determine Scale Economies
A Measure of Scale Economies
Empirical Studies of Cost Curves
Economies of Scale in Total Manufacturing Costs
Survivorship Studies
Cost Concepts for Multiproduct Firms
Table of Contents
Adaptation of Traditional Cost Concepts for a Multiproduct Firm
Economies of Scope
Economies of Scale and Economies of Scope
Specialization in Manufacturing
An Example of an Industry with Economies of Scope
Summary
Problems
Suggested Readings
APPENDIX 2A Cost Concepts for a Multiproduct Firm
EXAMPLE 2.1 Value of Limited Liability
EXAMPLE 2.2 Conflicts of Interest Between Managers and Shareholders
EXAMPLE 2.3 Specialization of Labor
EXAMPLE 2.4 Indiana Libraries
EXAMPLE 2.5 The Baking Industry
EXAMPLE 2.6 Electricity Minimum Efficient Scale and Scope
PART 2 Market StructuresCHAPTER 3 Competition
Perfect Competition
Assumptions
The Behavior of a Single Firm
The Competitive Market
Elasticities and the Residual Demand Curve
Elasticities of Demand and Supply
The Residual Demand Curve of Price Takers
Efficiency and Welfare
Efficiency
Welfare
Entry and Exit
Restrictions on Entry
Competition with Few FirmsContestability
Definition of Barriers to Entry
Identifying Barriers to Entry
The Size of Entry Barriers by Industry
Externalities
Limitations of Perfect Competition
The Many Meanings of Competition
Summary
Problems
EXAMPLE 3.1 Are Farmers Price Takers?
EXAMPLE 3.2 Restrictions on Entry Across Countries
EXAMPLE 3.3 FTC Opposes Internet Bans That Harm Competition
EXAMPLE 3.4 Increasing Congestion
CHAPTER 4 Monopolies, Monopsonies, and Dominant FirmsMonopoly Behavior
Table of Contents
Profit Maximization
Market and Monopoly Power
The Incentive for Efficient Operation
Monopoly Behavior over Time
The Costs and Benefits of Monopoly
The Deadweight Loss of Monopoly
Rent-Seeking Behavior
Monopoly Profits and Deadweight Loss Vary with the Elasticity of Demand
The Benefits of Monopoly
Creating and Maintaining a Monopoly
Knowledge Advantage
Government-Created Monopolies
Natural Monopoly
Profits and Monopoly
Is Any Firm That Earns a Positive Profit a Monopoly?
Does a Monopoly Always Earn a Positive Profit?
Are Monopoly Mergers to Eliminate Short-Run Losses Desirable?
Monopsony
Dominant Firm with a Competitive Fringe
Why Some Firms Are Dominant
The No-Entry Model
The Dominant FirmCompetitive Fringe Equilibrium
A Model with Free, Instantaneous Entry
Summary
Problems
Suggested Readings
EXAMPLE 4.1 Monopoly Newspaper Ad Prices
EXAMPLE 4.2 Monopolizing by Merging
EXAMPLE 4.3 Controlling a Key Ingredient
EXAMPLE 4.4 Preventing ImitationCat Got Your Tongue?
EXAMPLE 4.5 Protecting a Monopoly
EXAMPLE 4.6 EU Allows Merger to Eliminate Losses
EXAMPLE 4.7 Priest Monopsony
EXAMPLE 4.8 Price Umbrella
EXAMPLE 4.9 China Tobacco Monopoly to Become a Dominant Firm
CHAPTER 5 CartelsWhy Cartels Form
Creating and Enforcing the Cartel
Factors That Facilitate the Formation of Cartels
Enforcing a Cartel Agreement
Cartels and Price Wars
Consumers Gain as Cartels Fail
Price-Fixing Laws
Summary
Table of Contents
Problems
Suggested Readings
APPENDIX 5A The Effects of Cartel Size
EXAMPLE 5.1 An Electrifying Conspiracy
EXAMPLE 5.2 The Viability of Commodity Cartels
EXAMPLE 5.3 Concrete Example of Government Aided Collusion
EXAMPLE 5.4 Relieving the Headache of Running a Cartel
EXAMPLE 5.5 Vitamins Cartel
EXAMPLE 5.6 How Consumers Were Railroaded
EXAMPLE 5.7 The Social Costs of Cartelization
EXAMPLE 5.8 Prosecuting Global Cartels
CHAPTER 6 OligopolyGame Theory
Single-Period Oligopoly Models
Nash Equilibrium
The Cournot Model
The Bertrand Model
The Stackelberg Leader-Follower Model
A Comparison of the Major Oligopoly Models
Multiperiod Games
Single-Period Prisoners Dilemma Game
Infinitely Repeated Prisoners Dilemma Game
Types of Equilibria in Multiperiod Games
Experimental Evidence on Oligopoly Models
Summary
Problems
Suggested Readings
APPENDIX 6A A Mathematical Derivation of Cournot and Stackelberg Equilibria
APPENDIX 6B Mixed Strategies
EXAMPLE 6.1 Do Birds of a Feather Cournot- Flock Together?
EXAMPLE 6.2 Oligopoly Welfare Losses
EXAMPLE 6.3 Mergers in a Cournot Economy
EXAMPLE 6.4 Roller Coaster Gasoline Pricing
EXAMPLE 6.5 Copying Pricing
EXAMPLE 6.6 Car Wars
CHAPTER 7 Product Differentiation and Monopolistic CompetitionDifferentiated Products
The Effect of Differentiation on a Firms Demand Curve
Preferences for Characteristics of Products
The Representative Consumer Model
A Representative Consumer Model with Undifferentiated Products
A Representative Consumer Model with Differentiated Products
Conclusions About Representative Consumer Models
Location Models
Table of Contents
Hotellings Location Model
Salops Circle Model
Hybrid Models
Estimation of Differentiated Goods Models
Summary
Problems
Suggested Readings
APPENDIX 7A Welfare in a Monopolistic Competition Model with Homogeneous
Products
APPENDIX 7B Welfare in a Monopolistic Competition Model with Differentiated
Products
EXAMPLE 7.1 All Water Is Not the Same
EXAMPLE 7.2 Entry Lowers Prices
EXAMPLE 7.3 The Jeans Market
EXAMPLE 7.4 A Serial Problem
EXAMPLE 7.5 Combining Beers
EXAMPLE 7.6 Value of Minivans
CHAPTER 8 Industry Structure and PerformanceTheories of Price Markups and Profits
Structure-Conduct-Performance
Measures of Market Performance
Rates of Return
Price-Cost Margins
Measures of Market Structure
The Relationship of Structure to Performance
Modern Structure-Conduct-Performance Analysis
Theory
Empirical Research
Modern Approaches to Measuring Performance
Static Studies
Summary
Problems
APPENDIX 8A Relationship Between the Herfindahl-Hirschman Index (HHI) and
the Price-Cost Margin
APPENDIX 8B Identifying Market Power
EXAMPLE 8.1 Supermarkets and Concentration
EXAMPLE 8.2 How Sweet It Is
PART 3 Business Practices: Strategies and ConductCHAPTER 9 Price Discrimination
Nonuniform Pricing
Incentive and Conditions for Price Discrimination
Profit Motive for Price Discrimination
Conditions for Price Discrimination
Resales
Table of Contents
Types of Price Discrimination
Perfect Price Discrimination
Each Consumer Buys More Than One Unit
Different Prices to Different Groups
Other Methods of Third-Degree Price Discrimination
Welfare Effects of Price Discrimination
Summary
Problems
Suggested Readings
APPENDIX 9A An Example of Price Discrimination: Agricultural Marketing Orders
EXAMPLE 9.1 Coupons
EXAMPLE 9.2 Thank You, Doctor
EXAMPLE 9.3 Halting Drug Resales from Canada
EXAMPLE 9.4 Vertical Integration as a Means of Price Discrimination: Alcoa Shows
Its True Metal
EXAMPLE 9.5 A Discriminating Labor Union
EXAMPLE 9.6 Does Competition Always Lower Price?
CHAPTER 10 Advanced Topics in PricingNonlinear Pricing
A Single Two-Part Tariff
Two Two-Part Tariffs
Tie-in Sales
General Justifications for Tie-in Sales
Tie-in Sales as a Method of Price Discrimination
Package Tie-in Sales of Independent Products
Interrelated Demands
Quality Choice
Other Methods of Nonlinear Pricing
Minimum Quantities and Quantity Discounts
Selection of Price Schedules
Premium for Priority
Auctions
Summary
Problems
APPENDIX 10A The Optimal Two-Part Tariff
APPENDIX 10B Nonlinear Pricing with an Example
EXAMPLE 10.1 Football Tariffs
EXAMPLE 10.2 You Auto Save from Tie-in Sales
EXAMPLE 10.3 Stuck Holding the Bag
EXAMPLE 10.4 Tied to TV
EXAMPLE 10.5 Not Too SuiteMixed Bundling
EXAMPLE 10.6 Price Discriminating on eBay
CHAPTER 11 Strategic Behavior
Table of Contents
Strategic Behavior Defined
Noncooperative Strategic Behavior
Predatory Pricing
Limit Pricing
Investments to Lower Production Costs
Raising Rivals Costs
Welfare Implications and the Role of the Courts
Cooperative Strategic Behavior
Practices That Facilitate Collusion
Cooperative Strategic Behavior and the Role of the Courts
Summary
Problems
Suggested Readings
APPENDIX 11A: The Strategic Use of Tie-in Sales and Product Compatibility to
Create or Maintain Market Power with Applications to Networks
EXAMPLE 11.1 Supreme Court Says Alleged Predation Must Be Credible
EXAMPLE 11.2 Evidence of Predatory Pricing in Tobacco
EXAMPLE 11.3 The Shrinking Share of Dominant Firms
EXAMPLE 11.4 And Only a Smile Remained
EXAMPLE 11.5 Strategic Behavior and Rapid Technological Change: The Microsoft
Case
EXAMPLE 11.6 Value of Preventing Entry
EXAMPLE 11.7 The FTC versus Ethyl et al.
EXAMPLE 11.8 Information Exchanges: The Hardwood Case
CHAPTER 12 Vertical Integration and Vertical RestrictionsThe Reasons for and Against Vertical Integration
Integration to Lower Transaction Costs
Integration to Assure Supply
Integration to Eliminate Externalities
Integration to Avoid Government Intervention
Integration to Increase Monopoly Profits
Integration to Eliminate Market Power
The Life Cycle of a Firm
Vertical Restrictions
Vertical Restrictions Used to Solve Problems in Distribution
The Effects of Vertical Restrictions
Banning Vertical Restrictions
Franchising
Empirical Evidence
Evidence on Vertical Integration
Evidence on Vertical Restrictions
Summary
Problems
Suggested Readings
EXAMPLE 12.1 Outsourcing
Table of Contents
EXAMPLE 12.2 Preventing Holdups
EXAMPLE 12.3 Own Your Own Steel Mill
EXAMPLE 12.4 Double Markup
EXAMPLE 12.5 Blockbusters Solution to the Double Marginalization Problem
EXAMPLE 12.6 Free Riding on the Web
EXAMPLE 12.7 Brewing Trouble: Restricting Vertical Integration in Alcoholic
Beverage Industries
PART 4 Information, Advertising, and DisclosureCHAPTER 13 Information
Why Information Is Limited
Limited Information About Quality
The Market for Lemons
Solving the Problem: Equal Information
Evidence on Lemons Markets
Limited Information About Price
The Tourist-Trap Model
The Tourists-and-Natives Model
Providing Consumer Information Lowers Price
How Information Lowers Prices
An Example: Grocery Store Information Programs
Summary
Problems
Suggested Readings
APPENDIX 13A Market Shares in the Tourists-and- Natives Model
EXAMPLE 13.1 Genetically Modified Organisms: Do Consumers Not Care or Not Read?
EXAMPLE 13.2 Understanding Consumer Information
EXAMPLE 13.3 Counterfeit Halal Meat
EXAMPLE 13.4 Certifying Thoroughbreds
EXAMPLE 13.5 Price Dispersion and Search Costs in the Talmud
EXAMPLE 13.6 Price Dispersion
EXAMPLE 13.7 Tourist Cameras
CHAPTER 14 Advertising and Disclosure Information and Advertising
Promotions
Search Versus Experience Goods
Informational Versus Persuasive Advertising
Profit-Maximizing Advertising
Effects of Advertising on Welfare
Price Advertising Increases Welfare
Advertising to Solve the Lemons Problem
When Advertising Is Excessive
False Advertising
Limits to Lying
Antifraud Laws
Table of Contents
Disclosure Laws
Summary
Problems
Suggested Readings
APPENDIX 14A Profit-Maximizing Advertising
EXAMPLE 14.1 Branding and Labeling
EXAMPLE 14.2 Celebrity Endorsements
EXAMPLE 14.3 Milk Advertising
EXAMPLE 14.4 Social Gain from Price Advertising
EXAMPLE 14.5 Welfare Effects of Restricting Alcohol Ads
EXAMPLE 14.6 Restaurants Make the Grade
PART 5 Dynamic Models and Market Clearing CHAPTER 15 Decision Making Over Time: Durability
How Long Should a Durable Good Last?
Competitive Firms Choice of Durability
The Monopolys Choice of Durability
Costly Installation and Maintenance
Renting Versus Selling by a Monopoly
Resale Market
Consumers’ Expectations Constrain the Monopoly
Summary
Problems
Suggested Readings
APPENDIX 15A Multiperiod Durable Goods Monopoly
EXAMPLE 15.1 United Shoe
EXAMPLE 15.2 The Importance of Used Goods
EXAMPLE 15.3 The Alcoa Case: Secondhand Economics
EXAMPLE 15.4 Leasing Under Adverse Selection
EXAMPLE 15.5 Sales Versus Rentals
EXAMPLE 15.6 Lowering the Resale Value of Used Textbooks
CHAPTER 16 Patents and Technological ChangePatents, Copyrights, and Trademarks
Patents
Copyrights
Trademarks
Distinctions Between Patents, Copyrights, and Trademarks
Incentives for Inventions Are Needed
Imitation Discourages Research
Patents Encourage Research
Patents Encourage Disclosure
Patents, Prizes, Research Contracts, and Joint Ventures
Determining the Optimal Number of Firms
No Government Incentives
Government-Financed Research
Table of Contents
Prizes
Relaxing Antitrust Laws: Joint Ventures
Patents
Government Uncertainty
Patent Holders May Manufacture or License
Eliminating Patents
Market Structure
Market Structure Without a Patent Race
Optimal Timing of Innovations
Monopolies in Patent Races
Summary
Problems
Suggested Readings
EXAMPLE 16.1 Piracy
EXAMPLE 16.2 Patents Versus Trade Secrets
EXAMPLE 16.3 Monkey See, Monkey Do
EXAMPLE 16.4 Joint Public-Private R&D
EXAMPLE 16.5 Prizes
EXAMPLE 16.6 Mickey Mouse Legislation
EXAMPLE 16.7 European Patents
EXAMPLE 16.8 Patent Thicket
CHAPTER 17 How Markets Clear: Theory and FactsHow Markets Clear: Three Simple Theories
Competition
Oligopoly Models
Monopoly
Empirical Evidence on the Role of Price in Allocating Goods
The Rigidity of Prices
Movements in Prices and Price-Cost Margins over the Business Cycle
Explaining the Evidence
Extensions to the Simple Theory: The Introduction of Time
Fixed Costs of Changing Price
Implications of an Unchanging Price for Inventories
Asymmetric Information and Moral Hazard
Toward a General Theory of Allocation
Market Structure Is More Than Concentration
Produce-to-Order Versus Produce-to-Stock
Transmission of Shocks in Industries with Fixed Prices
Summary
Problems
EXAMPLE 17.1 Price RigidityIts the Real Thing
EXAMPLE 17.2 How Much Is That Turkey in the Window?
EXAMPLE 17.3 The Cost of Changing Prices
EXAMPLE 17.4 Creating Futures Markets
Table of Contents
EXAMPLE 17.5 Oh Say Does That Star-Spangled Banner Yet Fly?
PART 6 Government Policies and Their EffectsCHAPTER 18 International Trade
Reasons for Trade Between Countries
Comparative Advantage
Intra-Industry Trade in Differentiated Products
Free Riding, International Price Differences, and Gray Markets
Dumping
Tariffs, Subsidies, and Quotas
Competition
Creating and Battling Monopolies
Strategic Trade Policy
Industries with Positive Externalities
Empirical Evidence on Intervention in International Trade
Summary
Problems
APPENDIX 18A Derivation of the Optimal Subsidy
EXAMPLE 18.1 Gray Markets
EXAMPLE 18.2 Timber Wars and Retaliation
EXAMPLE 18.3 Foreign Doctors
EXAMPLE 18.4 Being Taken for a Ride: Japanese Cars
EXAMPLE 18.5 Wide-Body Aircraft
EXAMPLE 18.6 Steeling from U.S. Consumers
CHAPTER 19 Antitrust Laws and PolicyThe Antitrust Laws and Their Purposes
Antitrust Statutes
Enforcement
Goals of the Antitrust Laws
Who May Sue?
Economic Theory of Damages
The Use of U.S. Antitrust Laws
Private Litigation
Market Power and the Definition of Markets
Market Power
Market Definition
Cooperation Among Competitors
Price-Fixing and Output Agreements
Not All Agreements Among Competitors Are Illegal
Information Exchanges Among Competitors
Oligopoly Behavior
Mergers
Exclusionary Actions and Other Strategic Behavior
Competition Between Rivals
Competitive Behavior Deemed Undesirable by the Court
Vertical Arrangements Between Firms
Table of Contents
Price Discrimination
Price Discrimination Under Robinson-Patman
Tie-in Sales
Effects of Antitrust Laws on the Organization of Unregulated and Regulated Firms
Summary
Problems
Suggested Readings
EXAMPLE 19.1 Using the Government to Create Market Power: Misuse of the Orange
Book
EXAMPLE 19.2 Conflict Between European and U.S. Antitrust Authorities:
GE-Honeywell
EXAMPLE 19.3 The Merger Guidelines
EXAMPLE 19.4 Antitrust Laws in Other Countries
EXAMPLE 19.5 Colleges and Antitrust: Does Your School Belong to a Cartel?
EXAMPLE 19.6 The FTC Plays with Toys R Us
CHAPTER 20 Regulation and DeregulationThe Objectives of Regulators
Market Inefficiencies
Correcting Market Inefficiencies
Capture Theory and Interest-Group Theory
Making Monopolies More Competitive
Government Ownership
Privatizing
Franchise Bidding
Price Controls
Rate-of-Return Regulation
Quality Effects
Making Competitive Industries More Monopolistic
Limiting Entry
Agricultural Regulations: Price Supports and Quantity Controls
Deregulation
Airlines
Ground Transportation
Summary
Problems
Suggested Readings
EXAMPLE 20.1 Pizza Protection
EXAMPLE 20.2 Cross-Subsidization
EXAMPLE 20.3 Legal Monopolies
EXAMPLE 20.4 Public, Monopolistic, and Competitive Refuse Collection
EXAMPLE 20.5 Rent Control
EXAMPLE 20.6 Brewing Trouble
EXAMPLE 20.7 Deregulating Electricity: California in Shock
EXAMPLE 20.8 International and U.S. Deregulation in Telecommunications
Table of Contents
EXAMPLE 20.9 European Deregulation of Airlines
Bibliography
Glossary
Answers to Odd-Numbered ProblemsChapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Legal Case Index
Author Index
Subject Index