EC3322: Industrial Organisation I
AY2014/2015, Semester 1, Lecturer: Eric Fesselmeyer
Course Coverage:
1. Markets & Market Concentration
2. Costs
3. Perfect Competition
4. Monopoly
5. Dominant Firm with a Competitive Fringe
6. Price Discrimination, Bundling & Tying
7. Monopoly Product Variety & Quality
8. Static Oligopoly: Cournot & Bertrand Competitions
9. Dynamic Oligopoly: Stackelberg Competition
10. Collusions & Cartels
11. Product Differentiation
12. Horizontal & Vertical Mergers
13. Networks
This module is one of the most important applications of game theory in economics. Like game theory, this module is rather mathematical, with more focus on optimizations and computations than analysis.
The first chapter introduces the concept of market power and how it relates to elasticity. Subsequent chapters review basic producer theory from EC2101. A slightly different model, the dominant firm model, was introduced as the preliminary framework for heterogeneous firms. The topic on price discrimination, bundling and tying examines the strategies monopolistic firms adopt facing heterogeneous consumers and asymmetric information. In fact, the general form of the price discrimination model is a model of adverse selection. The last topic covered for midterm is product differentiation in a monopoly setting. This topic studies the welfare implications of horizontal variety, i.e. location differentiation, and vertical variety, i.e. quality differentiation, by a monopoly.
The second half of the module focus solely on oligopoly in the game-theoretic framework. Static and dynamic oligopolies and viewed as static and dynamics games, and the same old concepts from EC3312: Nash Equilibrium and Subgame Perfect Equilibrium are revisited as an application to industrial organization. Collusions and cartels are similarly examined using the concept of repeated games and trigger strategies from game theory. The last topic covered for the semester was product differentiation in the oligopoly setting, with firms engaging in location-based competition and quality-based competitions. Similarly, the welfare implications of these competitions were studied and compared against the monopoly-setting results.
The last two topics on mergers and networks were not covered due to time constraint but I have personally requested for the notes and read through them for a basic understanding. Competing firms may merged horizontally to become more profitable through cost savings and/or allowing the merged firm to become a Stackelberg leader. However, the consequence of a horizontal merger is that the merged firm may possess more market power, thereby increasing prices and harming the consumers. Vertical mergers between firms operating at different levels of the production process can lead to improvement in welfare because it eliminates double marginalization, i.e. double markup from two initial monopolistic firms. Networks examines the network externality that exist in the markets, which are the benefits consumers derived from joining a network of consumers and this effect relies heavily on consumer expectations. This concept is studied using multi-stage games and multiple Nash equilibria games.
This module content is broad, but they are generally intuitive. Also most problem sets are simple optimization problems with a few tricky parts. The challenging part in this module is the no-calculator rule for midterm test and final exam. The midterm computations are generally straightforward but for final exam, we have to manually compute the fractions and decimals using primary school methods, and hence mental arithmetic can make a huge difference. Be sure to present as many times as possible because you might need the class participation marks to make up for some calculation mistakes. All in all, it is a straightforward module that relies heavily on producer and consumer theories covered in basic microeconomics.
Workload: Light
Difficulty: Moderate
Grade: A
Course Coverage:
1. Markets & Market Concentration
2. Costs
3. Perfect Competition
4. Monopoly
5. Dominant Firm with a Competitive Fringe
6. Price Discrimination, Bundling & Tying
7. Monopoly Product Variety & Quality
8. Static Oligopoly: Cournot & Bertrand Competitions
9. Dynamic Oligopoly: Stackelberg Competition
10. Collusions & Cartels
11. Product Differentiation
12. Horizontal & Vertical Mergers
13. Networks
This module is one of the most important applications of game theory in economics. Like game theory, this module is rather mathematical, with more focus on optimizations and computations than analysis.
The first chapter introduces the concept of market power and how it relates to elasticity. Subsequent chapters review basic producer theory from EC2101. A slightly different model, the dominant firm model, was introduced as the preliminary framework for heterogeneous firms. The topic on price discrimination, bundling and tying examines the strategies monopolistic firms adopt facing heterogeneous consumers and asymmetric information. In fact, the general form of the price discrimination model is a model of adverse selection. The last topic covered for midterm is product differentiation in a monopoly setting. This topic studies the welfare implications of horizontal variety, i.e. location differentiation, and vertical variety, i.e. quality differentiation, by a monopoly.
The second half of the module focus solely on oligopoly in the game-theoretic framework. Static and dynamic oligopolies and viewed as static and dynamics games, and the same old concepts from EC3312: Nash Equilibrium and Subgame Perfect Equilibrium are revisited as an application to industrial organization. Collusions and cartels are similarly examined using the concept of repeated games and trigger strategies from game theory. The last topic covered for the semester was product differentiation in the oligopoly setting, with firms engaging in location-based competition and quality-based competitions. Similarly, the welfare implications of these competitions were studied and compared against the monopoly-setting results.
The last two topics on mergers and networks were not covered due to time constraint but I have personally requested for the notes and read through them for a basic understanding. Competing firms may merged horizontally to become more profitable through cost savings and/or allowing the merged firm to become a Stackelberg leader. However, the consequence of a horizontal merger is that the merged firm may possess more market power, thereby increasing prices and harming the consumers. Vertical mergers between firms operating at different levels of the production process can lead to improvement in welfare because it eliminates double marginalization, i.e. double markup from two initial monopolistic firms. Networks examines the network externality that exist in the markets, which are the benefits consumers derived from joining a network of consumers and this effect relies heavily on consumer expectations. This concept is studied using multi-stage games and multiple Nash equilibria games.
This module content is broad, but they are generally intuitive. Also most problem sets are simple optimization problems with a few tricky parts. The challenging part in this module is the no-calculator rule for midterm test and final exam. The midterm computations are generally straightforward but for final exam, we have to manually compute the fractions and decimals using primary school methods, and hence mental arithmetic can make a huge difference. Be sure to present as many times as possible because you might need the class participation marks to make up for some calculation mistakes. All in all, it is a straightforward module that relies heavily on producer and consumer theories covered in basic microeconomics.
Workload: Light
Difficulty: Moderate
Grade: A