Contemporary Industrial Organization

Transcription

1 Contemporary Industrial Organization A Quantitative Approach Lynne Pepall Dan Richards George Norman WILEY John Wiley & Sons, Inc.

2 Contents About the Authors Preface xiii xv Part I Microeconomic Foundations 1 1 Industrial Organization and Imperfect Competition: What, How, and Why What Is Industrial Organization? How We Analyze Imperfect Competition Why: Antitrust Policy and Industrial Organization Theory The "New" Sherman Act and the Dominance of Structure-Based Analysis The Tide Changes: The Chicago School and Beyond 11 Summary 14 Problems 14 References 15 Appendix Excerpts from Key Antitrust Statutes 15 2 Basic Microeconomics Competition versus Monopoly: The Poles of Market Performance Intertemporal Considerations and Constraints on Monopoly Power Time and the Evolution of Industry Structure Durable Goods and the Coase Conjecture The Nonsurplus Approach to Economic Efficiency 35 Summary 36 Problems 37 References 37 3 Technology and Cost Relationships Production Technology and Cost Functions for Single-Product Firms Cost Variables and Output Decisions Scale Economies, Sunk Costs, and Market Structure Cost Relations for Multiproduct Firms Scope and Scale Economies for Multiproduct Firms Different Versions of the Same Core Product Non-Cost Determinants of Market Structure Empirical Application: Cost Function Estimation, Scale and Scope Economies 56

3 vi Contents Summary 62 Problems 62 References 63 4 Market Structure and Market Power Measuring Market Structure Measurement Problems: What Is a Market? The Endogeneity of Market Structure Measuring Market Power the Lerner Index Again Empirical Application: Monopoly Power: How Bad Is It? 76 Summary 79 Problems 80 References 81 Part II Price and Nonprice Tactics for Firms with Market Power 83 5 Price Discrimination and Monopoly The Feasibility of Price Discrimination First-Degree Price Discrimination Personalized Pricing Two-Part Pricing Block Pricing Price Discrimination with Less Information Group Pricing or Third-Degree Discrimination Third-Degree Price Discrimination and Social Welfare Group Pricing: An Application with Linear Demand A Caveat on Welfare and Third-Degree Price Discrimination Second-Degree Price Discrimination: Menu Pricing A Two-Part Tariff Menu Pricing Menu Pricing and Social Welfare 108 Summary 110 Problems 111 References Price Discrimination, Product Variety, Bundling, and Tying Price Discrimination and Product Quality A (Relatively) Simple Example An Extension: Endogenous Quality A Further Extension: Damaged Goods Price Discrimination and Product Variety Bundling and Tying Bundling Required Tie-In Sales Bundling/Tying, Policy, and Competition Empirical Application: Price Discrimination, Product Variety, and Monopoly versus Competition 137

4 Contents vii Summary 140 Problems 141 References 142 Part III Oligopoly and Strategic Interaction Static Games and Quantity versus Price Competition A Brief Introduction to Game Theory Dominant and Dominated Strategies The Static Cournot Model Cournot Variation 1: Many Firms Cournot Variation 2: Many Firms and Different Costs The Bertrand Model Bertrand Competition Capacity Constraints Bertrand Competition Product Differentiation Strategic Substitutes and Complements Empirical Application: Brand Competition and Consumer Preferences Evidence from the California Retail Gasoline Market 164 Summary 167 Problems 168 References Dynamic Games and First and Second Movers The Stackelberg Model of Quantity Competition Sequential Price Competition Sequential Quality Choice Commitment and Credibility in Dynamic Games The Chain-Store Paradox 184 Summary 186 Problems 186 References Entry Deterrence and Predation Market Structure over Time: Random Processes & Stylized Facts Deterring Entry Limit Output and Limit Price Models Capacity Expansion as a Credible Entry-Deterring Commitment Evidence on Predatory Capacity Expansion Predation and Asymmetric Information Asymmetric Information and Limit Pricing Predation, Asymmetric Information, and Financial Constraints Long-Term Contracts as a Barrier to Entry Long-Term Contracts, Penalty Fees, and Entry Deterrence Naked Exclusion Predatory Conduct and Public Policy 223

5 viii Contents 9.6 Empirical Application: Entry Deterrence in the Pharmaceutical Industry 225 Summary 229 Problems 230 References Price Fixing and Repeated Games The Cartel's Dilemma Repeated Games Finitely Repeated Games Infinitely or Indefinitely Repeated Games Some Extensions Empirical Application 1: Estimating the Effects of Price-Fixing Cartels in Practice: Facilitating Factors and Practices Factors that Facilitate Collusion Facilitating Practices Antitrust Policy toward Cartels: Deterrence and Detection Antitrust Policy: Investigation versus Fines Antitrust Policy: Detecting Cartels Antitrust Policy: Leniency/Amnesty Programs Empirical Application: An Experimental Investigation of Leniency Programs 275 Summary 278 Problems 279 References 281 Part IV Contractual Relationships between Firms Horizontal Mergers Horizontal Mergers and the Merger Paradox Mergers and Cost Synergies Fixed-Cost Savings Variable Cost Savings Merged Firms as Stackelberg Leaders Sequential Mergers Horizontal Mergers and Product Differentiation Bertrand Competition with Linear Demand Mergers in a Spatial Market Public Policy and Horizontal Mergers Coordinated Effects of Mergers Consumer versus Producer versus Total Surplus Application: Evaluating the Impact of Mergers with Computer Simulation 318 Summary 320 Problems 321 References 322

6 Contents ix Part V 12 Vertical and Conglomerate Mergers Procompetitive Vertical Mergers Vertical Mergers, Price Discrimination, and Competition Vertical Mergers, Oligopoly, and Foreclosure Vertical Integration and Foreclosure in a Cournot Model Vertical Mergers in a Differentiated Products Setting A Reappraisal: The GE-Honeywell Merger Once More A Note on Conglomerate Mergers Empirical Application: Vertical Integration in the Ready-Mixed Concrete Industry 346 Summary 348 Problems 349 References Vertical Restraints Vertical Price Restraints and Antitrust Policy: A Brief History Vertical Price Restraints and Suppressed Competition Arguments in Support of Vertical Price Restraints Vertical Price Restraints as a Response to Double-Marginalization RPM Agreements and Retail Competition with Price Discrimination RPM Agreements to Ensure the Provision of Retail Services Retail Price Maintenance and Uncertain Demand Nonprice Vertical Restraints Exclusivity to Limit Free Riding Exclusivity and the Suppression of Competition Aftermarkets Empirical Application: Exclusive Dealing in the U.S. Beer Industry 380 Summary 384 Problems 385 References 386 Topics in Nonprice Competition: Advertising and Research and Development Advertising, Market Power, and Information Advertising and Monopoly Power: The Dorfman-Steiner Condition Advertising as Consumer Information Advertising and Quality Signaling Suppressed Information Advertising Content Advertising, Information, and Competition Advertising, Information, and Competition in a Product-Differentiated Market Advertising and Wasteful Competition Complements, Advertising, and Brand Names 408

7 x Contents Advertising and Building Brand Value Advertising and Extending the Reach The Nature of Advertising, Product Prices, and Welfare Empirical Application: Advertising, Information, and Prestige 414 Summary 419 Problems 419 References Research and Development A Taxonomy of Innovations Market Structure and the Incentive to Innovate Competition and the Replacement Effect Persistence of Monopoly and the Efficiency Effect A Possible Synthesis A More Complete Model of Competition and Innovation Evidence on the Schumpeterian Hypothesis Product and Process Innovation: Cournot versus Bertrand Product R&D Process R&D Product and Process R&D R&D Cooperation between Firms Noncooperative R&D Technology Cooperation Empirical Application: R&D Spillovers in Practice 451 Summary 454 Problems 455 References Patents and Patent Policy Optimal Patent Length Optimal Patent Breadth Gilbert and Shapiro Klemperer Some Conclusions Patent Races Monopoly Power and "Sleeping Patents" Patent Licensing The Incentive to License a Nondrastic Innovation Licensing, Drastic Innovations, and Monopoly Power Patent Licensing, Social Welfare, and Public Policy Recent Patent Policy Developments Empirical Application: Patent Law and Patent Practice in the Semiconductor Industry 489 Summary 491 Problems 492 References 493

8 Contents xi Part VI Special Topics: Networks and Strategie Trade Policy Network Markets Market Provision of a Network Service Monopoly Provision Competitive and Optimal Provision of a Network Service Networks, Competition, and Complementary Services Price Competition with Network Effects Network Competition and Complementary Services Systems Competition and the Battle over Industry Standards A Simple Model of Compatibility and Competition Compatibility, Standards, and Competition Application: Network Externalities in Computer Software Spreadsheets 513 Summary 517 Problems 517 References Strategic Commitments: Confronting Potential Entrants and International Rivalry The Strategic Value of Commitment Strategic Complements and Substitutes: Cats, Dogs, and the Lean and Hungry Look Strategic Complements and Competition: Fat Cats and Puppy Dogs Strategic Substitutes and Competition: Top Dogs and the Lean and Hungry Look Commitments and Strategies Strategic Commitments in International Markets Strategic Subsidies in an International Cournot Model Strategic Tariffs and Scale/Scope Economies Strategic R&D Subsidies Trade Agreements as Commitment Devices 535 Summary 537 Problems 538 References 539 Answers to Selected Problems Index