Course Syllabus and Outline*

Natural Monopoly, Competition Policy and Industry Performance


Industrial Organization II                                                       J. Peoples       

296:709                                                                                   Bolton Hall 808

Office Hours: Tu.-Th. 4-5 pm                                                Phone: 229-4482

Classroom Bolton B68                                                            Class Hours: T. Th. 2:00-3:15            



Work required for this course will consist of a three case projects worth 50 percent in total) of the final grade, and two term exams worth 25 percent each (50 percent total) of the final grade.  The two case projects will require knowledge of common statistical packages.  While the use of any statistical package is acceptable, a lecture on the rudiments of SAS will be provided.



I.  Natural Monopoly and  Subadditivity of Costs

A. Definition: Subadditivity

            1. Sanford V. Berg and John Tschirhart, Natural Monopoly Regulation (1998), Chapter 2, pages 21-51.

            2. W. Kip Viscusi, Joseph Harrington Jr. and John Vernon Economics of  Regulation and Antitrust


B. Applications

1. John D. Bitzan*, "The Structure of Railroad Costs and the Benefits/Costs of Mergers," Research in Transportation Economics, pp: 1-52 (1999)

2. Wesley Wilson and Yimin Zhou, "Telecommunications Deregulation and Subbadditive Costs: Are Local Telephone Monopolies Unnatural? International Journal of Industrial Organization, 2001 p: 909-30. week-2

            C. Empirical Techniques used to Test for Subadditivity

                        1. Hal Varian, Microeconomic Analysis Section 1.9 and section4.4.*

                                    - Necessary conditions for cost functions

                                    -CES, Cobb-Douglas, Leontif (Diewert) and Translog cost functions

                                    - Satisfying necessary conditions for the CES, Cobb-Douglas, Leontif (Diewert) and Tranlog cost functions

                        2. Class lecture on using SAS to estimate cost functions.

                                    - Using SAS to read an EXCEL file

                                    - Using the seemingly unrelated equations (SURE) procedure

- Using the parameter restrictions command Weeks 3-4

                        3. David Ryan and TerenceWales, “Imposing Local Concavity in the Translog and Generalized Leontif Cost Functions,” Economic Letters, pp: 253-260 (2000)

                        4. Catherine Morrison, “Quasi-Fixed inputs in US and Japanese Manufacturing: A Generalized Leontif Restricted Cost Function Approach”, The Review of Economics and Statistics, pp: 275-287 (1987)

                        5. Douglas Caves, Lauritis Christensen and Michael Tretheway, “ Flexible Cost Functions for Multiproduct Firms,” The Review of Economics and Statistics,  pp: 477-481 (1978).

                        6. Eduardo Martinez-Budria, Sergio Jara-Diaz and Francisco Javier Ramos Real, “ Adapting Productivity theory to the Quadratic Cost Funtion: An application to the Spainish Electric Sector (working paper).


II. Natural Monopoly and the Justification for Regulation

A.    Economic Regulation


1. R. Sherman, The Regulation of Monopoly, section 2.5-2.6 (2001)


2. Winston, Clifford and Robert Crandall, “Explaining Regulatory Policy,” Brookings Papers on Economic Activity: Microeconomics, pp: 1-31.


B. Efficient Pricing

3. R. Sherman, The Regulation of Monopoly, chapter-5 (2001)

4. J. Sidak and D. Spulber, The Efficient-Component Pricing Rule,” Chapter -8 in Deregulatory Takings and the Regulatory Contract, (2003)

5. R. Sherman, The Regulation of Monopoly, Chapter-5 “Second Best Pricing,” pages 124-131 (2001)

                        6. Pepermans, G. and B. Willams, “ Ramsey Pricing in a Congested Network with Market Power in Generation,”  Katholieke Universiteit Leuven working paper No. 2004-08.

                        7. Damus, S. “Ramsey Pricing by U.S. Railroads: Can it Exist?” Journal of Transport Economics and Policy, January 1984, pp:  51-62.  Weeks 5-7


Week 8: Mid-term examination: Wednesday February 23rd; Review session, Monday February 21st.



SPRING BREAK: March 18-24th



C. Peak-Load Pricing

1. R. Sherman,* The Regulation of Monopoly, chapter-4, pages 91-105 (2001)

2. Bergstrom, T. and J. Mackie-Mason,* “Some Simple Analytics of Peak-Load Pricing,” Rand Journal of Economics,  Summer, 1991, pp: 241-249.

3. Borenstein Severin and Holland, Stephen, “On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices,” Rand Journal of Economics, 2005, pp: 469-493.

4. Bishop, M. amd D. Thompson, “Peak-load Procongin Aviation,” Journal or Tranport Economics and Policy, 1992 pp: 71-82. week 10.



III. Natural Monopoly Regulation in Practice and Industry Perforance

A. How and why firms are regulated

1. S. Berg and J. Tschirhart*, Natural Monopoly Regulation, Chapter-8 pp: 283-320,


B. Rate-based regulation: The A-J effect for a single product firm

 2. R. Sherman,* The Regulation of Monopoly, chapter-8, pages 205-226 (2001)

 3. Baily, E. and Malone, J.* “Resource Allocation and the Regulated Firm, Bell Journal of Economics and Management Science, 1970 pp: 129-142.

             4. N. Satar and J. Peoples*, An Empirical Test of Modal Choice and Allocative Efficiency: Evidence from US Coal Transportation” Transportation Part E: Logistics and Transportation Review,  2010, pp: 1043-1056.

             5. Noel D. Uri. “Measuring The Change in Productive Efficiency in Telecommunications in the USA,” Journal of Economic Studies, 2002, pp: 150-167. weeks 11-13.

                                    -Empirical techniques used to test allocative efficiency

                                    -Using the nonlinearity in parameters estimation procedure when estimating SUR equations with parameter constraints



C. Price-Cap Regulation

1. C. Liston* "Price-Cap versus Rate-of-Return Regulation," Journal of Regulatory Economics, 1993 pp. 25-48.

2. T. Brennan*, "Regulating by Capping Prices," Journal of Regulatory Economics, 1989 pp. 133-147.

3. Eckenrod, Sarah*, “Incentive Regulation in Local Telecommunications: The Effects on Price Mark-ups,” Journal of Regulatory Economics, 2006, pp: 217-231.

4. D. Sappington and D. Sibley,  "Strategic Non-Linear Pricing Under Price-Cap Regulation," Rand Journal of Economics, 1992, pp: 1-19.

5. Gerhard, Clemenz, “Optimal Price-Cap Regulation,” Journal of Industrial Economics, 2001, pp: 391-408.

6. Braeutigam, R. and J. Panzar, “Effects of the Change from Rate-of-Return to Price-Cap Regulation,” American Economic Review, 1993, pp: 191-198.

7. Ros, A. “The Impact of the Regulatory Process and Price-Cap Regulation in Latin American Telecommunications Markets, Review of Network Economics, 2003, pp 270-286.

8. Chunrong Ai and David Sappington, “The Impact of State Incentive Regulation On the US Telecommunications Industry,” Journal of Regulatory Economics, 2002, pp: 133-160.

9. Larry Blank and John Mayo, “Endogenous Regulatory Constraints and the Emergence of Hybrid Regulation, Review of Industrial Organization, 2009, 233-155.

10.  Werner Neu, “Allocative Inefficiency Propoerties of Price Cap Regulation,” Journal of Regulatory Economics, 1993, pp: 159-182.

11.  Noel Uri, “Technical Efficiency, Allocative Efficiency, and the Implementation of a Price-Cap Plan in Telecommunications in the United States,” Journal of Applied Economics, 2001, pp: 163-186. week 14



IV. Competition, Deregulation and Privatization and Industry Performance


1. Tae Hoon Oum and Yimin Zhang*, “Competition and Allocative Efficiency: The Case of the U.S. Telephone Industry,” Review of Economics and Statistics1995, pp: 82-96.

2. Mark Armstrong and David Sappington,*“Regulation, Competition and Liberalization,” Journal of Economic Literature, June 2006, pp: 325-366.

3. J. Ying, "The Inefficiency of Regulating a Competitive Industry: Productivity Gains in Trucking Following Reform," Review of Economics and Statistics, 1990, pp: 191-201.

                        4. D. G. McFetridge* “The Economics of Privatization,” C.D. Howe Institute Benefactors Lecture, 1997.

5. M. E. Beesley and S. C. Littlechild, “The Regulation of Privatized Monopolies in the United Kingdom,” RAND Journal of Economics, 1989, pp: 454-472.

6. John Ying and Theodore Keeler, “Pricing in a Deregulated Environment: The Motor Carrier Experience,” RAND Journal of Economics, 1991, pp: 264-27.

7. John D. Bitzan and Theodore E. Keeler, “Productivity Growth and Some of Its Determinants in the Deregulated U.S. Railroad Industry”, Southern Economic Journal, pp: 232-253 (2003).*

8. Gallop, F. and M. Roberts, “The Sources of Economic Growth in the US Electric Power Industry, in Productivity Measurement in Regulated Industries, 1981.  Week-16


(Final review session: Thursday May 10th)

(FINAL EXAMINATION: 12:30-2:30, Wednessday May16th)