I Foundations Introduction 1.1 A More Formal Introduction to IO 1.1.1 The Demand for Industrial Organization 1.2 Methodologies 1.2.1 The New Industrial Organization 1.2.2 The Theory of Business Strategy 1.2.3 Antitrust Law 1.3 Overview of the Text 1.3.1 Foundations 1.3.2 Monopoly 1.3.3 Oligopoly Pricing 1.3.4 Strategic Behavior 1.3.5 Issues in Antitrust Economics 1.3.6 Issues in Regulatory Economics 1.4 Suggestions for Further Reading The Welfare Economics of Market Power 2.1 Profit Maximization 2.2 Perfect Competition 2.2.1 Supply 2.2.2 Market Equilibrium 2.3 Efficiency 2.3.1 Measures of Gains from Trade 2.3.2 Pareto Optimality 2.4 Market Power 2.4.1 Market Power and Pricing 2.4.2 Measurement and Determinants of Market Power 2.4.3 The Determinants of Deadweight Loss 2.5 Market Power and Public Policy 2.6 Chapter Summary 2.7 Suggestions for Further Reading Theory of the Firm 3.1 Neoclassical Theory of the Firm 3.1.1 Review of Cost Concepts 3.1.2 The Potential Advantages of Being Large 3.1.3 Economies of Scale and Seller Concentration 3.2 Why Do Firms Exist 3.2.1 Two Puzzles Regarding the Scope of a Firm 3.2.2 Explanations for the Existence of Firms 3.2.3 Alternative Economic Organizations 3.2.4 Spot Markets 3.2.5 Specific Investments and Quasi-Rents 3.2.6 Contracts 3.2.7 Complete vs. Incomplete Contracts 3.2.8 Vertical Integration 3.3 Limits to Firm Size 3.3.1 The Paradox of Selective Intervention 3.3.2 Property Rights Approach to the Theory of the Firm 3.4 Do Firms Profit Maximize 3.4.1 Shareholder Monitoring and Incentive Contracts 3.4.2 External Limits to Managerial Discretion 3.5 Chapter Summary 3.6 Suggestions for Further Reading II Monopoly 4 Market Power and Dominant Firms 4.1 Sources of Market Power 4.1.1 Government Restrictions on Entry 4.1.2 Structural Characteristics 4.1.3 Strategic Behavior by Incumbents 4.2 A Dominant Firm with a Competitive Fringe 4.2.1 The Effect of Entry 4.3 Durable Goods Monopoly 4.3.1 The Coase Conjecture 4.3.2 Pacman Economics 4.3.3 Coase vs. Pacman 4.3.4 Recycling 4.4 Market Power: A Second Look 4.4.1 X-Inefficiency 4.4.2 Rent Seeking 4.5 Benefits of Monopoly 4.5.1 Scale Economies 4.5.2 Research and Development 4.6 Chapter Summary 4.7 Suggestions for Further Reading Non-Linear Pricing and Price Discrimination 5.1 Examples of Price Discrimination 5.2 Mechanisms for Capturing Surplus 5.3 Market Power and Arbitrage: Necessary Conditions for Price Discrimination 5.4 Types of Price Discrimination 5.4.1 First-Degree Price Discrimination 5.4.2 Third-Degree Price Discrimination 5.4.3 Second-Degree Price Discrimination 5.4.4 General Non-Linear Pricing 5.4.5 Optimal Non-Linear Pricing 5.5 Antitrust Treatment of Price Discrimination 5.6 Chapter Summary 5.7 Suggestions for Further Reading 6 Market Power and Product Quality 6.1 Search Goods 6.1.1 Monopoly Provision of Quality 6.1.2 Quality Discrimination 6.2 Experience Goods and Quality 6.2.1 Moral Hazard and the Provision of Quality 6.2.2 The Lemons Problem 6.3 Signaling High Quality 6.3.1 A Dynamic Model of Reputation for Quality 6.3.2 Advertising as a Signal of Quality 6.3.3 Warranties 6.4 Chapter Summary 6.5 Suggestions for Further Reading 6.6 Appendix: The Complete Model of Quality Discrimination III Oligopoly Pricing Game Theory I 7.1 Why Game Theory 7.2 Foundations and Principles 7.2.1 The Basic Elements of a Game 7.2.2 Types of Games 7.2.3 Equilibrium Concepts 7.2.4 Fundamental Assumptions 7.3 Static Games of Complete Information 7.3.1 Normal Form Representation 7.3.2 Dominant and Dominated Strategies 7.3.3 Rationalizable Strategies 7.3.4 Nash Equilibrium 7.3.5 Discussion and Interpretation of Nash Equilibria 7.3.6 Mixed Strategies 7.4 Chapter Summary 7.5 Suggestions for Further Reading 7.6 Appendix: Nash Equilibrium in Games with Continuous Strategies 8 Classic Models of Oligopoly 8.1 Static Oligopoly Models 8.2 Cournot 8.2.1 Cournot Best-Response Functions and Residual Demand Functions 8.2.2 Properties of the Cournot Equilibrium 8.2.3 Free-Entry Cournot Equilibrium 8.2.4 The Efficient Number of Competitors 8 3 Bertrand Competition 8.3.1 The Bertrand Paradox 8.3.2 Product Differentiation 8.3.3 Capacity Constraints 8.4 Cournot vs. Bertrand 8.5 Empirical Tests of Oligopoly 8.5.1 Conjectural Variations 8.6 Chapter Summary 8.7 Suggestions for Further Reading 8.8 Appendix: Best-Response Functions, Reaction Functions, and Stability 8.8.1 Stability 8.8.2 Uniqueness Game Theory II 9.1 Extensive Forms 9.2 Strategies vs. Actions and Nash Equilibria 9.3 Noncredible Threats 9.3.1 Subgame Perfect Nash Equilibrium 9.3.2 The Centipede Game 9.4 Two-Stage Games 9.5 Games of Almost Perfect Information 9.5.1 Finitely Repeated Stage Game 9.5.2 Infinitely Repeated Stage Game 9.6 Chapter Summary 9.7 Suggestions for Further Reading 9.8 Appendix: Discounting 10 Dynamic Models of Oligopoly 10.1 Reaching an Agreement 10.1.1 Profitability of Collusion 10.1.2 How Is an Agreement Reached 10.1.3 Factors That Complicate Reaching an Agreement 10.2 Stronger, Swifter, More Certain 10.3 Dynamic Games 10.3.1 Credible Punishments and Subgame Perfection: Finite Games 10.4 Supergames 10.4.1 Subgame Perfection and Credible Threats: Infinite Game 10.4.2 Harsher Punishment Strategies 10.4.3 Renegotiation Proof Strategies 10.5 Factors That Influence the Sustainability of Collusion 10.6 Facilitating Practices 10.6.1 Efficiency and Facilitating Practices 10.7 Antitrust and Collusion 10.8 Chapter Summary 10.9 Suggestions for Further Reading 11 Product Differentiation 11.1 What Is Product Differentiation 11.2 Monopolistic Competition 11.2.1 Preference Specification 11.2.2 Monopolistic Competition: Equilibrium 11.2.3 Too Many Brands of Toothpaste 11.3 Bias in Product Selection 11.3.1 Asymmetric Preferences 11.4 Address Models 11.4.1 Consumer Preferences 11.4.2 A Simple Address Model: Hotelling''s Linear City 11.4.3 Free Entry into the Linear City 11.4.4 Localized Competition 11.4.5 Efficiency of the Market Equilibrium 11.4.6 Endogenous Pricing 11.4.7 Pricing and the Principle of Minimum Differentiation 11.5 Strategic Behavior 11.5.1 Brand Proliferation 11.5.2 Brand Specification 11.5.3 Brand Preemption 11.6 Oligopoly Equilibrium in Vertically Differentiated Markets 11.7 Chapter Summary 11.8 Suggestions for Further Reading 12 Identifying and Measuring Market Power 12.1 Structure, Conduct, and Performance 12.1.1 SCP in Practice: The Framework 12.1.2 SCP in Practice: The Results 12.1.3 Critiques of SCP Studies 12.2 The New Empirical Industrial Organization 12.2.1 Structural Models 12.2.2 Nonparametric, or Reduced-Form, Approaches 12.3 The NEIO and SCP: A Summing Up 12.4 Chapter Summary 12.5 Suggestions for Further Reading IV Strategic Behavior 13 An Introduction to Strategic Behavior 13.1 Strategic Behavior 13.1.1 Strategic vs. Tactical Choices 13.2 The Stackelberg Game 13.2.1 Stackelberg Equilibrium 13.3 Entry Deterrence 13.3.1 Constant Returns to Scale 13.3.2 Economies of Scale 13.4 Introduction to Entry Games 13.4.1 Limit Pricing 13.4.2 A Stylized Entry Game 13.5 Chapter Summary 13.6 Suggestions for Further Reading 14 Entry Deterrence 14.1 The Role of Investment in Entry Deterrence 14.1.1 Dixit''s Model of Entry Deterrence 14.1.2 Strategic Investment and Monopolization 14.2 Contestable Markets 14.2.1 Logical Possibility 14.2.2 Robustness 14.2.3 Empirical Relevance 14.2.4 Contestability and Barriers to Entry 14.3 Entry Barriers 14.3.1 Positive Definitions of Barriers to Entry 14.3.2 An Assessment of Barriers to Entry 14.3.3 Normative Definitions of Entry Barriers 14.4 Chapter Summary 14.5 Suggestions for Further Reading 15 Strategic Behavior: Principles 15.1 Two-Stage Games 15.2 Strategic Accommodation 15.3 Strategic Entry Deterrence 15.4 The Welfare Effects of Strategic Competition 15.5 Chapter Summary 15.6 Suggestions for Further Reading 16 Strategic Behavior: Applications 16.1 Learning by Doing 16.1.1 Learning with Price Competition 16.1.2 Learning and Entry Deterrence 16.2 Switching Costs 16.2.1 Strategic Manipulation of an Installed Base of Customers 16.2.2 Incorporating New Buyers 16.2.3 Endogenous Switching Costs 16.3 Vertical Separation 16.4 Tying 16.5 Strategic Trade Policy I: Export Subsidies to Regional Jets 16.6 Strategic Trade Policy Il:. The Kodak-Fujifilm Case 16.7 Managerial Incentives 16.8 Research and Development 16.9 The Coase Conjecture Revisited 16.10 Chapter Summary 16.11 Suggestions for Further Reading 17 Advertising and Oligopoly 17.1 Normative vs. Positive Issues: The Welfare Economics of Advertising 17.2 Positive Issues: Theoretical Analysis of Advertising and Oligopoly 17.2.1 Advertising as an Exogenous Sunk Cost 17.2.2 Advertising as an Endogenous Sunk Cost 17.2.3 Cooperative and Predatory Advertising 17.3 Advertising and Strategic Entry Deterrence 17.4 A More General Treatment of Strategic Advertising: Direct vs. Indirect Effects 17.5 Positive Issues: Advertising and Oligopoly Empirics 17.6 Chapter Summary 17.7 Suggestions for Further Reading 18 Research and Development 18.1 A Positive Analysis: Strategic R&D 18.2 Market Structure and Incentives for R&D 18.2.1 A More Careful View of Market Structure 18.2.2 Patent Races 18.2.3 Stochastic Patent Races 18.2.4 Product Innovation and Patent Races 18.3 Normative Analysis: The Economics of Patents 18.3.1 Other Forms of Intellectual Property Protection: Copyrights and Trademarks 18.4 Chapter Summary 18.5 Suggestions for Further Reading V Issues in Antitrust Economics 19 The Theory of the Market 19.1 The Concept of a Market 19.1.1 Economic Markets 19.1.2 Antitrust Markets 19.2 Antitrust Markets: The Search for Market Power 19.2.1 Market Power and Antitrust 19.2.2 Market Power and Market Shares 19.2.3 The Importance of Demand Elasticities 19.2.4 Critical Elasticities of Demand 19.2.5 Break-Even Elasticities of Demand 19.2.6 Recent Developments: Innovation Markets 19.3 The Practice of Market Definition 19.3.1 Demand Elasticities 19.3.2 The Structural Approach 19.3.3 Shipment Flows 19.3.4 Qualitative Evaluative Criteria 19.4 Antitrust Markets in Monopolization Cases: The Cellophane Fallacy 19.4.1 The Cellophane Fallacy and Mergers 19.5 Chapter Summary 19.6 Suggestions for Further Reading 20 Exclusionary Strategies I: Raising Rivals'' Costs 20.1 A Simple Model of Raising Rivals'' Costs 20.2 The Salop and Scheffman Model: Raising the Costs of a Competitive Fringe 20.3 Accommodation vs. Deterrence Strategies 20.4 A More General Treatment of Raising Rivals'' Costs: Direct vs. Indirect Effects 20.5 Reducing Rivals'' Revenue 20.6 Raising Rivals'' Costs in Antitrust 20.7 Chapter Summary 20.8 Suggestions for Further Reading 21 Exclusionary Strategies II: Predatory Pricing 21.1 The Classic Chicago Attack on Predation 21.2 Rational Theories of Predation 21.2.1 The Long Purse 21.2.2 Reputation Models 21.2.3 Signaling Models of Predation 21.2.4 Softening Up the Victim 21.2.5 Predation in Learning and Network Industries 21.3 Empirical Evidence on Predation 21.3.1 Case Studies 21.3.2 Experimental Evidence 21.4 Predation in Antitrust 21.4.1 Areeda-Turner and Cost-Based Definitions of Predation 21.4.2 Major Antitrust Cases 21.5 Chapter Summary 21.6 Suggestions for Further Reading 21.7 Appendix: An Introduction to Games of Incomplete Information 21.7.1 Bayesian Games 21.7.2 Extensive-Form Bayesian Games with Observable Actions 21.7.3 Multiple but Finite Numbers of Victims in the Extortion Game 22 Vertical Integration and Vertical Restraints 22.1 Incentives for Vertical Merger Vertical Integration 22.1.1 Transaction Economies 22.1.2 Vertical Integration to Avoid Double Marginalization 22.1.3 Vertical Integration with Perfect Competition Downstream: Fixed Proportions 22.1.4 Vertical Integration with Perfect Competition Downstream: Variable Proportions 22.2 Vertical Restraints 22.2.1 Restraints on Intrabrand Competition 22.2.2 Alternative Explanations of RPM and Exclusive Territorial Restrictions 22.2.3 RPM, Exclusive Territories, and Welfare 22.2.4 Antitrust Policy toward RPM and Exclusive Territories 22.3 Contractual Exclusivity 22.3.1 Tying Arrangements 22.3.2 Exclusive Dealing 22.4 Chapter Summary 22.5 Suggestions for Further Reading 22.6 Appendix: Price versus Non-Price Competition in the Winter Model 23 Horizontal Mergers 23.1 A Partial-Equilibrium Analysis of Horizontal Mergers 23.1.1 Price versus Efficiency: The Williamson Trade Off 23.1.2 The Use of the Herfindahl Index in Merger Analysis 23.2 Equilibrium with Nonmerging Firms: A More General Analysis 23.2.1 Mergers in Differentiated Markets 23.3 The Coordinated Effects of Mergers 23.4 Entry 23.5 Mergers: The Antitrust Framework 23.5.1 Merger Guidelines 23.5.2 Market Definition 23.5.3 Innovation Markets 23.5.4 Entry and Product Repositioning 23.5.5 Efficiencies: A Growing Emphasis 23.5.6 Methodology: The Growing Role of Simulation in Antitrust Analysis 23.6 Chapter Summary 23.7 Suggestions for Further Reading 23.8 Appendix: Bertrand Equilibrium with Three Differentiated Products VI Issues in Regulatory Economics 24 Rationale for Regulation 24.1 Public Interest Justifications for Regulatory Intervention 24.1. l The Market Failure Test 24.1.2 Natural Monopoly 24.1.3 Large Specific Investments 24.2 The Economic Theories of Regulation 24.2.1 The Theory of Economic Regulation 24.2.2 Explaining Regulation Using a Principal-Agent Approach 24.3 Chapter Summary 24.4 Suggestions for Further Reading 24.5 Appendix: Subadditivity and Multiproduct Firms 25 Optimal Pricing for Natural Monopoly 25.1 Efficient Pricing by a Single-Product Natural Monopolist 25.1.1 First-Best Pricing 25.1.2 Second-Best Pricing: Ramsey Prices 25.1.3 First- vs. Second-Best Pricing 25.2 Multiproduct Natural Monopoly 25.2.1 Ramsey Pricing 25.3 Peak-Load Pricing 25.3.1 A Simple Illustrative Model of Peak-Load Pricing 25.3.2 Optimal Capacity 25.3.3 Discussion of Peak-Load Pricing 25.4 Multipart Tariffs 25.4.1 Two Common Examples of Multipart Tariffs 25.4.2 The Coase Result 25.4.3 N-Part Tariffs and a Menu of Two-Part Tariffs 25.4.4 Pareto-Dominating Block Tariffs 25.5 Chapter Summary 25.6 Suggestions for Further Reading 26 Issues in Regulation 26.1 Regulation under Asymmetric Information 26.1.1 The Full-Information Benchmark 26.1.2 Asymmetric Information: The Importance of Distributional Considerations 26.1.3 An Optimal Regulatory Mechanism: Hidden Information 26.1.4 An Optimal Regulatory Mechanism: Hidden Action 26.1.5 Implications for Regulatory Regimes 26.2 Regulation in Practice 26.2.1 Cost-of-Service Regulation 26.2.2 An Assessment of COS Regulation 26.2.3 Summary of Cost-of-Service Regulation 26.2.4 Incentive Regulation 26.2.5 Guidelines for Regulation 26.3 Regulatory Reform in Network Industries 26.3.1 Why Regulated Firms Should Be Kept Out of Unregulated Markets 26.3.2 Access Pricing and Interconnection 26.3.3 The Interconnection Problem 26.3.4 The Efficient Component Pricing Rule 26.3.5 Optimal Access Pricing 26.4 Chapter Summary 26.5 Suggestions for Further Reading Appendix The Legal Framework of Antitrust Enforcement A.1 Antitrust in the United States A.I.1 The Sherman Act A. 1.2 The Clayton Act A.I.3 Enforcement in the U.S. A.2 Competition Policy in Canada A.2.1 Criminal Provisions in the Competition Act A.2.2 The Director of Research and Investigation A.2.3 Noncriminal Reviewable Offenses A.3 Competition Policy of the European Union A.3.1 Enforcement in the EU A.4 Suggestions for Further Reading Selected Solutions for Odd Numbered Questions Index of Names Subject Index
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