Industrial Organization Competition, Strategy and Policy Fourth edition John Lipczynski, John O.S. Wilson and John Goddard PEARSON Harlow, England London New York Boston San Francisco Toronto " Sydney Auckland Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town Sao Paulo Mexico City Madrid Amsterdam Munich Paris Milan
Preface Acknowledgements XXIV xxvii 1 Industrial organization: an introduction 1.1 Introduction 1.2 Static and dynamic views of competition 1.3 The structure-conduct-performance paradigm 1.4 Strategic management: a short diversion Discussion questions Further reading 3 4 6 25 28 29 2 Production, costs, demand and profit maximization 30 2.1 Introduction 31 2.2 Production and costs 31 2.3 Demand, revenue, elasticity and profit maximization 48 2.4 Summary 59 Discussion questions - 60 Further reading 60 3 The neoclassical theory of the firm 61 3.1 Introduction 61 3.2 The neoclassical theory of the firm: historical development 62 3.3 Theories of perfect competition and monopoly 64
viii Contents 3.4 Efficiency and welfare properties of perfect competition and monopoly 70 3.5 Theory of monopolistic competition 76 3.6 Summary 79 Discussion questions 80 4 Managerial and behavioural theories of the firm 81 4.1 Introduction \ 81 4.2 Critique of the neoclassical theory of the firm 82 4.3 Separation of ownership from control: managerial theories of the firm 85 4.4 The behavioural theory of the firm 97 4.5 Summary 99 Discussion questions 100 Further reading 100 5 Transaction costs, agency and resource-based theories of the firm. 101 5.1 Introduction 101 5.2 The Coasian firm 102 5.3 Transaction costs and the theory of the firm 105 5.4 Agency theory 110 5.5 Property rights and the theory of the firm 113 5.6 The resource-based theory of the firm 114 5.7 Summary 118 Discussion questions 119 Further reading ' 120 6. Corporate governance 121 6.1 Introduction 121 6.2 Agency problems and the need for corporate governance 123 6.3 Instruments of corporate governance, 126 6.4 Corporate governance codes of practice 130 6.5 Corporate governance: implementation and empirical evidence 133 6.6 Business ethics 139 6.7 Corporate social responsibility 144 6.8 Summary 153 Discussion questions 156 Further reading 156
Contents ix 7 Oligopoly: non-collusive models 159 7.1 Introduction 160 7.2 Interdependence, conjectural variation, independent action and collusion 161 7.3 Models of output determination in duopoly 162 7.4 Models of price determination in duopoly 174 7.5 The kinked demand curveand models of price leadership 179 7.6 Game theory 184 7.7 Summary 200 Discussion questions 201 Further reading 202 8 Oligopoly: collusive models 203 8.1 Introduction 203 8.2 Collusive action and collusive forms 204 8.3 Collusive institutions, 207 8.4 Profit-maximizing models of price and output determination for a cartel 211 8.5 Other motives for collusion 214 8.6 Factors conducive to cartel formation 217 8.7 Influences on cartel stability 222 8.8 Summary 232 Discussion questions 233 Further reading 233 9 Concentration: measurement and trends 234 9.1 Introduction 234 9.2 Market and industry definition 235 9.3 Official schemes for industry classification 238 9.4 Measures of seller concentration 241 9.5 Interpretation of concentration measures < 259 9.6 Summary 260 Discussion questions 261 Further reading 262 10 Determinants of seller concentration 263 10.1 Introduction 264 10.2 Seller concentration: systematic determinants 264
Contents 10.3 The random growth hypothesis 272 10.4 Trends in concentration and the location of industry 281 10.5 Summary 297 Discussion questions 298 Further reading 299 11 Barriers to entry 300 11.1 Introduction ; 300 11.2 Types of barrier toentry 302 11.3 Entry-deterring strategies 315 11.4 Signalling commitment 322 11.5 Potential entry and contestability 324 11.6 Entry and industry evolution 327 11.7 Empirical evidence on entry -, 329 11.8 Summary 332 Discussion questions 334 Further reading 335 12 Market structure, firm strategy and performance 336 12.1 Introduction 336 12.2 Empirical tests of the SCP paradigm 337 12.3 Strategic groups 343 12.4 Sources of variation in profitability: industry, corporate and business unit effects 344 12.5 The new empirical industrial organization (NEIO) : 348 12.6 The persistence of profit 355 12.7 Summary 360 Discussion questions 362 Further reading, 363 13 Pricing 367 13.1 Introduction 367 13.2 Cost plus pricing 368 13.3 Price discrimination 373 13.4 Peak-load pricing 390 13.5 Transfer pricing 393 13.6 Price dispersion 402 13.7 Summary 404"
Contents xi Discussion questions 406 Further reading 407 14 Auctions 408 14.1 Introduction 408 14.2 Auction formats and models of bidders'valuations 410 14.3 The pure common value model and the winner's curse 412 14.4 Optimal bidding strategies and revenue equivalence in the independent private values model 415 14.5 Extensions and additional-topics in auction theory 422 14.6 Empirical evidence 428 14.7 Summary 436 Discussion questions 437 Further reading 438 15 Product differentiation 439 15.1 Introduction 439 15.2 Types of product differentiation 441 15.3 Monopolistic competition revisited: the socially optimal amount of product differentiation \ 445 15.4 Lancaster's product characteristics model 447 15.5 Hotelling's location model 452 15.6 Salop's location model 465 15.7 Summary 469 Discussion questions : 471 Further reading 471 16 Advertising 472 16.1 Introduction 472 16.2 Determinants of advertising expenditure 475 16.3 Advertising and product characteristics 483 16.4 Advertising and profit maximization 485 16.5 Advertising as a barrier to entry 490 16.6 Advertising, information search and quality signalling 492 16.7 Is there too much advertising? 496 16.8 Empirical evidence " 500 16.9 Summary 503 Discussion questions 504 Further reading 505
xii Contents 17 Research and development 506 17.1 Introduction 506 17.2 Market structure, firm size and the pace of technological change 507 17.3 Investment in research and development 521 17.4 Diffusion 526 17.5 Patents 532 17.6 Empirical evidence 538 17.7 Summary 544 Discussion questions 547 Further reading 548 18 Horizontal mergers and strategic alliances 549 18.1 Introduction 549 18.2 Profit-maximizing motives for horizontal mergers 551 18.3 Non-profit-maximizing motives for horizontal mergers 557 18.4 Merger waves 561 18.5 Strategic alliances 564 18.6 Horizontal mergers: some empirical evidence 566 18.7 Summary \ 568 Discussion questions 569 Further reading. 570 19 Vertical integration 571 19.1 Introduction 571 19.2 Motives for vertical integration: enhancement of market power 572 19.3 Motives for vertical integration: cost savings 579 19.4 Vertical disintegration ' 588 19.5 Empirical evidence on vertical integration 589 19.6 \Agency and vertical relationships 590 19.7 Summary 598 Discussion questions 599 Further reading, 600 20 Vertical restraints " 601 20.1 Introduction 601 20.2 Motives for vertical restraints 602 20.3 Forms of vertical restraint 605 20.4 Summary - 615 Discussion questions 616 Further reading 616
Contents xiii 21 Network goods and services 617 21.1 Introduction 617 21.2 Demand for a network product or service 619 21.3 Market equilibrium price and quantity for a network good or service: perfect competition and monopoly 626 21.4 Market equilibrium price and quantity for a network good or service: duopoly 631 21.5 Forms of competition over standardization and compatibility 636 21.6 Summary 639 Discussion questions '" 641 Further reading 641 22 Diversification 642 22.1 Introduction 642 22.2 Types of diversification 643 22.3 Motives for diversification 645 22.4 Corporate focus and deconglomeration 657 22.5 Empirical evidence 659 22.6 Summary 664 Discussion questions 666 Further reading 666 s 23 Competition policy 669 23.1 23.2 23.3 23.4 23.5 Introduction Competition policy: theoretical framework Elements of competition policy Implementation of competition policy Summary 669 670 679 681 694 Discussion questions Further reading 696 697 24 Regulation Requlation 698 24.1 24.2 24.3 24.4 24.5 Introduction The problem of natural monopoly Nationalization Privatization Forms of regulation 698 700 701 702 709
XIV Contents 24.6 Regulation of UK privatized industries 714 24.7 Regulation of the banking industry 720 24.8 Evaluation of regulation and deregulation 723 24.9 Franchising and competitive tendering 726 24.10 Summary 731 Discussion questions 734 Further reading 735 Appendix 1 Mathematical methods 739 Appendix 2 Econometric methods 762 Glossary 772 Bibliography 783 Index 822 Supporting resources Visit www.pearsoned.co.uk/lipczynski to find valuable online resources For instructors rj PowerPoints of book figures and tables for usage during lecturers m Instructor's manual containing answers to book discussion questions For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/lipczynski.