2. Different approaches to studying Industrial Organization.

1 Chapter 1: Industrial Organization: What, How and Why?

Learning Objectives:

Students should learn:

Description of Industrial Organization

• The Nature of Industrial Organization.
• The motivation for formal analysis of imperfect competition.
• A brief history of U.S. antitrust policies and enforcements.
• Global antitrust actions and measurement.

Suggested Lecture Outline:

Spend one lecture fifty-minute long lecture on this chapter. The topics that may be covered are:

• Description of Industrial Organization.
• Different approaches to studying Industrial Organization.
• Antitrust policies and history in the U.S.
• Examples / Case Studies.

Suggestions for the Instructor:

• Clearly explain the organization of your course on the first day of class.
• Motivate the students about Industrial Organization with examples / case studies that the

students can relate to – particularly with historic examples with names the students will recognize like Standard Oil, Kinney Shoes, Alcoa Aluminum, etc.

• Make the students solve / discuss few problems from the end of Chapter 1.

Solutions to the End of the Chapter Problems:

Problem 1

Many examples imperfectly competitive markets are possible. Common ones include: (1) Automobiles, (2) Beer, (3) Telephone/Telecommunications, (4) Jet Aircraft, (5) Patented Pharmaceuticals, and (6) Computer Operating Systems, .Large entry costs, scale economies, network effects and government regulations all play a role in these examples.

Problem 2

In a perfectly competitive market, each agent is a price taker. That is, decisions of individual firms and / or consumesr do not affect the market price or environment. Therefore, there is no room for strategic behavior in a perfectly competitive market.

Problem 3

In general, the Clayton Act was designed to prevent monopoly “in its incipiency” by making explicitly illegal a number of business practices. In particular, Section 2 prevents strategic manipulations of the upstream / downstream market by a firm with market power. Under Section

• of the Clayton Act, it is illegal to “discriminate in price between different purchasers of

(Industrial Organization Contemporary Theory and Empirical Applications 5e Lynne Pepall, Dan Richards, George Norman) (Solution Manual all Chapters) 1 / 4

2 commodities of like grade and quality”. Section 7 was passed to prevent anti-competitive mergers.

Problem 4

If higher concentration leads to higher worker productivity, then industrial concentration can lower production cost, and therefore, horizontal mergers may improve economic efficiency.

Problem 5

Market dominance by one firm may be due to the firm’s better performance, higher efficiency etc. Price fixing, however, does not indicate higher efficiencies for the participating firms. It simply hurts the consumers and reduces overall welfare.

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3

Chapter 2: Basic Microeconomics

Learning Objectives:

Students should learn to:

• Explain the characteristics of perfect competition, and the concept of short run versus

long run.

• Explain the following, compute them algebraically, and display them graphically:
• Revenue
• Total cost of production
• Economic profit
• Marginal cost
• Marginal revenue
• Profit maximizing conditions for a competitive firm
• Graphically explain profit maximization of the individual firm and relate it to the short-

run equilibrium of the market under perfect competition with identical firms.

• Derive competitive supply function assuming constant input prices.
• Draw average and marginal cost curves that make economic sense and explain the shape

of the curves that they draw.

• Graphically explain the long-run equilibrium for a competitive industry using the zero

profit condition and the potential for firm entry.

• Show how the equilibrium changes in the short and long run due to demand shocks. The

student will also be able to explain what happens when there are technology or input price shocks on the system.

• Derive an equation for marginal revenue for the linear inverse demand curve.
• Graph any linear inverse demand and the associated marginal revenue curve. The student

will be able to explain why marginal revenue is always less than price for a monopolist with downward sloping demand.

• Explain graphically and algebraically the profit maximizing conditions for a monopolist.
• Graphically show the profit of a monopoly firm using the marginal revenue curve, the

demand curve, the marginal cost curve, and the average total cost curve.

• The student will be able to solve problems involving present value.
• Explain, display and compute graphically, and compute algebraically the following

measures of consumer and producer welfare:

• Consumer surplus
• Producer surplus for a single competitive firm
• Producer surplus for a competitive industry
• Total surplus or welfare

• Show graphically the deadweight loss that results from monopoly. The student will also 3 / 4

4 be able to compute this loss given parameters for demand, cost and/or supply functions.

• Explain various relationships between the interest rate r, and the discount rate, R.

16.Explain the importance of firm size (production or sales potential) relative to market demand as it relates to monopoly power and market inefficiency.

Suggested Lecture Outline:

Spend three fifty-minute long lectures on this chapter.

Lecture 1:

• Brief review of consumer demand and the linear inverse demand function
• Characteristics of perfect competition
• Optimal choice of output
• Individual versus market supply
• Market equilibrium and the zero profit condition

Lecture 2:

• Monopoly (market) power and downward sloping demand
• Marginal revenue for a monopolist
• Profit maximizing choice of a monopolist
• Equilibrium and positive economic profit
• Opportunity cost of financial capital
• Present value analysis and discounting
• The interest r and the discount rate R = 1/r
• Discounting for multiple time periods
• Discounting for infinite time periods
• Comparison of alternative cost and return streams

Lecture 3:

• Concepts of economic surplus
• Consumer, producer, and total surplus with competition
• Computing consumer, producer and total surplus for the monopoly firm
• Efficiency comparisons of competition and monopoly using surplus concepts

e.

• Present value analysis and discounting
• The interest r and the discount rate R = 1/r
• Discounting for multiple and infinite time periods
• The Coase Durable Goods Model
• Non-surplus approach to economic efficiency
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