I_Foundations - I.Foundations Reading:Chapter14 1...

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I Foundations I. Foundations Reading: Chapter 1 4 Reading: Chapter 1 4 1
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I.I. Industrial Organization: What, How, and Why WHAT is Industrial Organization? Study of How firms behave in markets Whole range of business issues price of flowers; payment to be official sponsor f j t of major events which new products to introduce merger decisions methods for attacking or defending markets Industrial Organization takes a Strategic ie of ho firms interact view of how firms interact Chapter 1: Industrial Organization 2
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I.I. Industrial Organization: What, How, and Why HOW Industrial Organization proceeds in practice? Rely on the tools of game theory focuses on strategy and interaction Construct models: abstractions ll bli h d di i i ll i well established tradition in all science Simplification but gain the power of generalization Empirical Analysis—Use theory to form testable Empirical Analysis Use theory to form testable hypotheses Measure scale economies (Chapter 4) for entry deterring actions (Chapter 13) Experiment with penalty for price fixing (Chapter 15) Examine the impact of advertising (Chapter 21) Chapter 1: Industrial Organization 3
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I.I. Industrial Organization: What, How, and Why WHY do Industrial Organization? Long standing concern with market power Sherman Antitrust Act (Standard Oil) Need for anti trust policy recognized by Adam Smith The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand sell their commodities much above the demand, sell their commodities much above the natural price.” People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raiseprices.” Chapter 1: Industrial Organization 4
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I.I. Industrial Organization: What, How, and Why WHY do Industrial Organization? Sherman Act 1890 Section 1: prohibits contracts, combinations and conspiracies “in restraint of trade” Section 2: makes illegal any attempt to monopolize a market Clayton Act (1914) intended to prevent monopoly “in its incipiency” makes illegal practices that “may substantially lessen competition makes illegal practices that may substantially lessen competition or tend to create a monopoly” Federal Trade Commission established in the same year However, application affected by rule of reason proof of intent “the law does not make mere size an offence” Chapter 1: Industrial Organization 5
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I.I. Industrial Organization: What, How, and Why Structure Conduct and Performance Structure, Conduct, and Performance The Structure Conduct Performance Model Spectrum of markets: pure competition ‐‐ pure monopoly Closer to monopoly means worse welfare loss IO mission is to identify link from market structure to firm conduct (pricing, advertising, etc) to market outcomes (deadweight loss) Chapter 1: Industrial Organization 6
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I.I. Industrial Organization: What, How, and Why
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