Industrial Organization: Contemporary Theory and Empirical Applications

725 Pages·2014·7.82 MB·English

by  Lynne Pepall

Pepall f03.tex V2-11/06/2013 8:33P.M. Pagex
Pepall f01.tex V1-11/06/2013 10:12P.M. Page1
Industrial Organization
Contemporary Theory
and Empirical Applications
Fifth Edition
Lynne Pepall
Dan Richards
George Norman
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VICEPRESIDENT&EXECUTIVEPUBLISHER GeorgeHoffman
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LibraryofCongressCataloging-in-PublicationData
Pepall,Lynne,1952-
Industrialorganization:contemporarytheoryandempiricalapplications/LynnePepall,DanRichards,
GeorgeNorman.–Fifthedition.
pagescm
Includesbibliographicalreferencesandindex.
ISBN978-1-118-25030-3(pbk.:alk.paper) 1. Industrialorganization. I.Richards,DanielJay.
II.Norman,George,1946-III.Title.
HD31.P3772014
658.1–dc23
2013032338
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
AbouttheAuthors v
PrefacetotheFifthEdition vii
PartOne Foundations 1
1 IndustrialOrganization:What,How,andWhy 2
2 BasicMicroeconomics 19
3 MarketStructureandMarketPower 47
4 TechnologyandCost 64
PartTwo MonopolyPowerinTheoryandPractice 91
5 PriceDiscriminationandMonopoly:LinearPricing 92
6 PriceDiscriminationandMonopoly:NonlinearPricing 119
7 ProductVarietyandQualityUnderMonopoly 142
8 CommodityBundlingandTie-InSales 173
PartThree StrategicInteractionandBasicOligopolyModels 213
9 StaticGamesandCournotCompetition 214
10 OligopolisticPriceCompetition 242
11 DynamicGamesandFirstandSecondMovers 264
PartFour AnticompetitiveBehaviorandAntitrustPolicy 283
12 EntryDeterrenceandPredation 284
13 PredatoryConduct:MoreRecentDevelopments 316
14 PriceFixing,RepeatedGames,andAntitrustPolicy 349
PartFive ContractualRelationsBetweenFirms 385
15 HorizontalMergers 386
16 VerticalandConglomerateMergers 427
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iv Contents
17 VerticalPriceRestraints 459
18 Non-PriceVerticalRestraints 486
PartSix Non-PriceCompetition 515
19 Advertising,MarketPower,andInformation 516
20 ResearchandDevelopment 548
21 PatentsandPatentPolicy 578
PartSeven Networks,Auctions,andStrategicPolicyCommitment 611
22 NetworkIssues 612
23 Auctions:BasicTheoryandApplications 637
24 StrategicCommitmentsandInternationalTrade 661
AnswerstoPracticeProblems 677
Index 695
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About The Authors
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
mathematicsandeconomicsfromTrinityCollege,UniversityofToronto,andherPh.D.in
economicsfromtheUniversityofCambridgeinEngland.Shehaswrittennumerouspapers
inindustrialorganization,appearinginTheJournalofIndustrialEconomics,International
Journal of Industrial Organization, Journal of Economics and Management Strategy,
EconomicJournal,JournalofFinance,CanadianJournalofEconomics,Economica,and
the American Journal of Agricultural Economics. She has taught industrial organization
andmicroeconomicsatboththegraduateandundergraduatelevelsatConcordiaUniversity,
Queens University, and Tufts. Professor Pepall lives in Newton, Massachusetts, with her
husband,aco-authorofthisbook,andtheirdog,Churchill.
DanRichardsisProfessorandcurrentChairofEconomicsatTuftsUniversity.Professor
Richards received his A.B. in economics and history from Oberlin College and his Ph.D.
ineconomicsatYaleUniversity.ProfessorRichardshaswrittennumerousarticlesinboth
macroeconomicsandindustrialorganization,appearingintheAmericanEconomicReview,
Quarterly Journal of Economics, Journal of Industrial Economics, Economica, the B. E.
Journals in Economic Analysis and Policy, Canadian Journal of Economics, the Journal
ofMoney,Credit,andBanking,andtheAmericanJournalofAgriculturalEconomics.He
servedasDirectoroftheGraduatePrograminEconomicsfrom1989through1998,andhas
alsoservedasaconsultanttotheFederalTradeCommission.From1996to2005hetaught
AppliedEconomicsintheSloanFellowsProgramatMIT’sSloanSchoolofManagement.
ProfessorRichardslivesinNewton,Massachusetts,withhiswife,aco-authorofthisbook,
andtheirdog,Churchill.
George Norman holds the 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).
ProfessorNormanattendedtheUniversityofDundee(Scotland)wherehewasawardedthe
MA in Economics with first class honors. He received his Ph.D. in economics from the
University of Cambridge, England. His more than 70 published articles have appeared in
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vi AboutTheAuthors
suchprofessionaljournalsastheAmericanEconomicReview,ReviewofEconomicStudies,
Quarterly Journal of Economics, Journal of Industrial Economics, and International
Journal of Industrial Organization. He is currently an Associate Editor for two journals,
theBulletinofEconomicResearchandRegionalScienceandUrbanEconomics.Heisalso
ontheeditorialboardoftheBEJournalsinEconomicAnalysisandPolicy.Inadditionto
this book, Professor Norman has written and edited, either alone or in collaboration with
others,17otherbooks.ProfessorNormanhastaughtcoursesinindustrialorganizationand
microeconomic theory at both the graduate and undergraduate levels. He has also taught
introductoryeconomics,corporatestrategy,internationaleconomics,andentrepreneurship.
ProfessorNormanlivesinNewbury,Massachusetts,withhiswifeMargaretwho,whilenot
aco-author,hasprovidedinvaluablesupportandassistanceinhisworkonthisbook.
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Preface to the Fifth Edition
We are greatly pleased by the publication of the fifth edition of Industrial Organization:
Contemporary Theory and Practice. It is gratifying to have such continued market
confirmationofourconceptualizationofthefieldanditsmajorcontributions—inparticular,
that the application of rigorous thinking about strategic interaction yields important and
testableinsightsintorealworldevents.Webelievethatthiseditionofourtextbookrenews
thismessage.
Overall, the organization of the book is roughly the same as the previous edition but
thereareimportantchanges.Thetwochaptersonprice-fixingandanti-trustpolicyvis-a`-vis
collusion (Chapters 14 and 15 in the fourth edition) have been streamlined and combined
into one chapter. The same is true for the formerly two separate chapters on advertising
(Chapters 20 and 21 in the fourth edition). More importantly, we have added a new
chapteronstrategicinteractionasitappliestointernationalcompetitionandthescopethis
introducesforstrategictradepolicies.Thenetchangeisonelesschapterandamoreconcise
text.
The two most substantive changes, however, are: 1) the inclusion of a somewhat
extended discussion of a single empirical study in each chapter; and 2) the shift of all
calculus derivations to chapter appendices. The first of these builds on the innovation in
thefourtheditioninwhichweincludedanempiricalstudyinroughlyeveryotherchapter.
Finding studies that are both appropriate for each chapter’s subject matter and also well
suited to the statistical training of the variety of students using the text is not an easy
task. However, we believe that we have done a good job in this respect. This includes
the inclusion of a straightforward empirical comparison of antitrust enforcement across
countriesintheintroductoryfirstchapter.
Shiftingthecalculussectionstotheappendixwill,wehope,makethebookmoreusable
forthoseteachingclasseswithoutastrongmathematicsprerequisitewhilestillmakingthat
materialavailableforthosewhowantamoreformalapproach.Thisisnottosaythatthere
is no math in the current text. We still include a lot of algebra and derive a lot of results
fromthefirstorderconditionofmarginalrevenueequaltomarginalcost.Algebraicanalysis
is also prevalent in the empirical applications of each chapter. However, those seeking a
formalcalculuspresentationfullyintegratedintotheprimarytextmaybebetterservedby
thequantitativealternativeversion,ContemporaryIndustrialOrganization:AQuantitative
Approach.
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viii PrefacetotheFifthEdition
ACKNOWLEDGMENTS
OurstudentsatTuftsandelsewherehavebeenextremelyhelpfulandweoweeachofthem
a great deal of thanks. Special recognition in this regard is due to Sonia Jaffe and Kevin
Proulx,whoprovidedincredibleassistancewiththechapterproblems,powerpointslides,
and much more. In addition, the comments of formal reviewers, instructors, and simply
those who wished to be helpful have been very insightful. Among this group, we wish to
giveparticularthanksto:
SheriAggarwal,UniversityofVirginia ChristosGenakos,SelwynCollege,
SimonAnderson,UniversityofVirginia Cambridge
DavidAudretsch,IndianaUniversity GeraldGranderson,MiamiUniversityof
VassiliosBardis,YorkUniversity Ohio
EmekBasker,UniversityofMissouri ArneHallam,IowaStateUniversity
GaryBiglaiser,UniversityofNorth JustineHastings,BrownUniversity
Carolina MehdiHaririan,BloomsburgUniversity
GiacomoBonanno,Universityof OliverHart,HarvardUniversity
California/Davis BarryHaworth,UniversityofLouisville
StaceyBrook,UniversityofIowa HugoA.Hopenhayn,UCLA
PeterHuang,UniversityofColorado
ErikBrynjolfsson,MIT
HugoA.Hopenhayn,UCLA
SamBucovetsky,YorkUniversity
PeterHuang,UniversityofColorado
GiacomoCalzolari,UniversityofBologna
StanleyKardasz,UniversityofWaterloo
MarceloCelani,TorcuatodiTello
PhillipKing,SanFranciscoState
University
University
DarleneChisholm,SuffolkUniversity
JohnKwoka,NortheasternUniversity
HenryW.Chappell,Jr.,Universityof
NicolaLacetera,UniversityofToronto
SouthCarolina
RobertLawrence,HarvardUniversity
YongminChen,UniversityofColorado
JohnLogan,ANU
CarlosCinquetti,Sa˜oPaoloUniversity
NancyLutz,NationalScienceFoundation
JohnR.Conlon,UniversityofMississippi
HowardMarvel,OhioStateUniversity
JamesDana,NortheasternUniversity
CatherineMatraves,FCC
RichardDagen,FederalTradeCommission
JaimeMaya,UniversityofSanFrancisco
LarryDeBrock,UniversityofIllinois
deQuito
GeorgeDeltas,UniversityofIllinois
JillMcCluskey,WashingtonState
GregEllis,UniversityofWashington
University
GlennEllison,MIT
DeborahMenegotto,TuftsUniversity
SaraFisherEllison,MIT
EugenioJ.Miravete,UniversityofTexas
StephenErfle,DickinsonCollege ErichMuehlegger,KennedySchool
GianniDeFraja,UniversityofLeicester WallaceMullin,GeorgeWashington
RobertM.Feinberg,AmericanUniversity University
AnnHarperFender,GettysburgCollege JonNelson,PennsylvaniaStateUniversity
MarkR.Frascatore,ClarksonUniversity CraigNewmark,NorthCarolinaState
LukeFroeb,VanderbiltUniversity University
ShailendraGajanan,Universityof DavidOng,PekingUniversity
Pittsburgh DebashisPal,UniversityofCincinnati
IanGale,GeorgetownUniversity NicolaPersico,UniversityofPennsylvania
PaoloGarella,UniversityofMilan RussellPittman,DepartmentofJustice