Industrial Organization Prof. J. Peoples

296:432 NWQ 4410

University of Wisconsin-Milwaukee Department of Economics

Office Hours: 2-3pm Tu. Th. Email: peoples@uwm.edu

Class Time: 4-5:15pm Class Location: LubarS263

Phone: 229-4482

**Course Description**

This course will explore and analyze the ways in which industrial activity is organized into firms and industries and how that organization is related to economic performance. Consideration of the internal organization of firms and the behavior of industries dominated by a few firms moves the economic analysis away from the world of competitive markets. There will be a simple introduction to game theoretic and information-theoretic concepts of the “new industrial organization” to complement the traditional “structure-conduct –performance” approach.

Given that this course is open to graduates and undergraduates, the learning objectives will differ by graduate status. A more practical emphasis is provided for undergraduates, as the content of their term paper and problem sets will focus on current economic events. Graduate student will be expected to incorporate mathematical models and contemporary econometric techniques for their paper and problem sets.

**Course Requirements**

Work required for this course consists of two problem sets worth 25 percent of the final grade, a term paper and a midterm examination each worth 25 percent of the final grade, and a final examination worth 25 percent of the final grade.

**Textbook**

Don E. Waldman and Elizabeth J. Jensen, __Industrial
Organization__, fourth edition, Pearson, 2013.

**Course Outline**

__I. Introduction__

A.
Overview: Chapter-1 **(week-1)**

-Definition of Industrial Organization

-Models

1. Structure-Performance-Conduct

2. Price Theory

a. Chicago School Approach

3. Game Theory

-Theory and Empiricism

__II. The Firm and Its Cost__

A.
Managerial Objectives: Chapter-2 **(week-2)**

-Profit Maximization

a. rule-of-thumb-pricing

b. price mark-up

-Satisficing

B.
Costs: Chapter-2 **(week-3)**

-Long-run cost curves

-Short-run cost curves

-Properties of cost curve

-Cobb Douglas cost curve

a. elasticity of substitution

b. derived factor demand

-Economies of Scale

-Economies of Scope

III. Competition and Monopoly

A.
Perfect Competition: Chapter-3 **(week-4)**

-Conditions

-Short-run profit maximization

-Long-run profit maximization

-Consumer and Producer surplus

B.
Monopoly: Chapter-3 **(week-4)**

-Conditions

-MR and demand

-Demand Elasticity and market power

IV. Game Theory: A framework for Understanding Oligopolistic Behaviour (Chapter-7)

A.
Definition and Terms **(week-5)**

B.
Simple Zero-Sum Games **(week-5)**

C.
Prisoners Dilemma Games **(week-6)**

D.
Repeated Games **(week-6)**

E.
Games of Mixed Strategy **(week-7)**

F.
Sequential Games **(week-7)**

**Midterm Examination: Week-8,
Thursday October 25 ^{th}, Review Session, Tuesday October 23rd)**

V. The Development of Theory (Chapter-8)

A.
Models Based on Quantity Determination (Chapter-9) **(****weeks 9-10)**

-The Cournot Model

a. examples in real markets

b. empirical evidence

c. the paradox of mergers

-The Stackelberg Model

a. firms with identical costs and demand

b. firms with different costs

c. empirical examples

-The Bertrand Model

a. examples in real markets

b. bounded rationality

c. the Bertrand-Edgeworth model with capacity constraints

**(Detailed outline of term paper is due, Thursday, November 15th)**

VI. Cartels: Cooperative Oligopoly, (Chapter-9) **(****weeks 11-12)**

A. Prisoners dilemma revisited

B. Trigger price strategies

C. The effect of cartel size

**(Thanksgiving Break. November 21 ^{st}-25th)**

VII. Technological Change and Research and Development **(weeks 13-14)**

A. Schumpeter and the process of “Creative Destruction”

B. The Process of Technological Change

C. Market Structure, Firm Size, and Technological Advancement

D. Empirical Evidence

VIII. Regulation and Deregulation **(weeks 15-16)**

A. Rate of Return Regulation (A-J Model)

B. Price-Cap Regulation

C. Deregulation

-Surface Transportation

-Airlines

**(Term papers are due the last day of class)**

**(Final examination: 3:00pm-5:00pm, Wednesday, December 19 ^{th})**