Industrial Organization: A Strategic Approach

1024 Pages·1999·4.5 MB·English

Industrial Organization: A Strategic Approach
Jeffrey Church and Roger Ware
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I
NDUSTRIAL
O
RGANIZATION

I
NDUSTRIAL
O
RGANIZATION
A Strategic Approach
Jeffrey Church
The University of Calgary
Roger Ware
Queen’s University, Ontario
Boston BurrRidge,IL Dubuque,IA Madison,WI NewYork SanFrancisco
St.Louis Bangkok Bogota´ Caracas Lisbon London Madrid MexicoCity
Milan NewDelhi Seoul Singapore Sydney Taipei Toronto
IndustrialOrganization
AStrategicApproach
Copyright(cid:2)c 2000byTheMcGraw-HillCompanies,Inc.Allrightsreserved.PrintedintheUnitedStates
ofAmerica.ExceptaspermittedundertheUnitedStatesCopyrightActof1976,nopartofthis
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LibraryofCongressCataloging-in-PublicationData
Church,JeffreyR.,1962-
Industrialorganization:Astrategicapproach/JeffreyChurch,RogerWare.
p.cm.
Includesindex.
1.Industrialorganization. I.Ware,Roger. II.Title.
HD31.C52951999
658.1–dc21
99-052661
http://www.mhhe.com
Tothememoryofmyparents,AubreyandJanet,whowereherewhenthisbookbegan,
butnotatitsconclusion.
AndtoDevon,Harriet,andMolly,who,mostthankfully,arestillhere.
R.W.
ToRichard,Elizabeth,and,especially,Maureen.
J.R.C.
A b o u t t h e A u t h o r s
JeffreyChurchhasaPh.D.ineconomicsfromtheUniversityofCaliforniaatBerkeley.Heisan
AssociateProfessorintheDepartmentofEconomicsattheUniversityofCalgaryandtheAcademic
DirectorfortheCentreforRegulatoryAffairsintheVanHorneInstituteforInternationalTransporta-
tionandRegulatoryAffairs.Hewasthe1995–1996T.D.MacDonaldChairinIndustrialEconomics
attheCanadianCompetitionBureau.Hispublishedresearchincludesarticlesonnetworkeconomics,
strategiccompetition,entrydeterrence,intellectualpropertyrights,andcompetitionpolicy.Heisthe
coauthorofabookontheregulationofnaturalgaspipelinesinCanada.Thepopularityandeffective-
nessofhisundergraduateindustrialorganizationclasshasleadtobothuniversityandstudentunion
teachingexcellenceawards.Hehasactedasanexpertinregulatoryhearingsandantitrustcases.
Roger Ware is Professor of Economics at Queen’s University, Kingston, Canada. He taught pre-
viouslyattheUniversityofTorontoandhasheldavisitingpositionattheUniversityofCalifornia
atBerkeley.From1993–1994heheldtheT.D.MacDonaldChairinIndustrialOrganizationatthe
Competition Bureau, Ottawa, giving advice to the Commissioner on a wide range of competition
policytopicsandcases.Hisresearchinterestsarefocusedonantitrusteconomics,intellectualprop-
ertyandtheeconomicsofthebankingsector.Hehaspublishedarticlesinalloftheseareasaswellas
numerousotherpublicationsinscholarlyjournalsandbooksonIndustrialOrganizationissues.He
teachesgraduateandundergraduatecoursesinIndustrialOrganizationandhaslecturedwidelyon
antitrusttopics.Hehasalsoappearedasanexpertwitnessinantitrustcasesandregulatoryhearings.
vi
P r e f a c e
Inthepasttwodecadestherehasbeenanexplosionofinterestandintellectualactivityinindustrial
organization.Industrialorganizationwasirreversiblytransformedandrejuvenatedbybreakthroughs
innoncooperativegametheoryand,inturn,developmentsinindustrialorganizationinformedand
reinvigoratedantitrustenforcement.Industrialorganizationtextbooksreflectedneitherthisupheaval
nor the excitement of studying a field that was in a period of rapid change, growth, and rising
prominence.Wesetouttomeetthischallengewithacompletelynewandcomprehensivebookthat
systematicallypresentsandmakesaccessibletheadvancesandnewlearningofthepasttwentyyears.
A focus and concern with market power underpins industrial organization, and it underpins
andtiestogetherIndustrialOrganization:AStrategicApproach(IOSA).Whatarethedeterminants
of market power? How do firms create, utilize, and protect it? When are antitrust enforcement or
regulationappropriatepolicyresponsestothecreation,maintenance,orexerciseofmarketpower?
Therevolutioningametheoryprovidedthetoolstounderstandcompetitionasabattleformonopoly
rents, where nonprice competition (advertising, product design, research and development, etc.)
creates an environment where firms can harvest economic profits. The emphasis in IOSA is on
strategic competition and how firms can shelter their market power and economic profits from
competitors.Thefocusonfirmconducttoacquireandmaintainmarketpoweralsoestablishesthe
intellectualfoundationfordeterminingwhichbusinesspracticeswarrantantitrustexaminationand
prohibition,andinthisregardthenewlearningunderliesrecentactivistantitrustpolicy.
Applications and Antitrust
Inamajorinnovationforaneconomicstext,ourbookusesantitrustapplicationsandantitrustcases
asaconstant“realitycheck”onthetheoreticalmodelsthatwedevelop.Antitrustcasesprovidearare
opportunityforopendebateon“therightmodel”offirmbehaviororacertaincontractualpractice.
Moreover,giventheaggressivenessanddramaticflourisheswithwhichtheinterestedpartiespursue
theircases,aswellastheimportanceandhighprofileofcasesinkeysectorsoftheneweconomy,
antitrustcasesareanaturalandeffectivedeviceforengagingtheinterestofstudents.IOSAispacked
fullofcasestudiesbasedonantitrustenforcement—bothclassiccases,suchasStandardOil,Alcoa,
GeneralElectric,andAmericanTobacco,andmoremoderncases,suchasMicrosoft,Toys“R”Us,
Archer Daniels Midland, and NASDAQ. IOSA also features extensive industry case studies that
illustrateindustrialorganizationanditsapplication:Intel,DeBeers,professionalsportsleagues,and
videogamesarejustfourexamples.
Game Theory and Expositional Approach
Wewantedtowriteatextbookthatmadeitpossible,indeedrequired,studentstotakeanactiverole
inlearning.InIOSAweconstantlychallengestudentswithpuzzlesandquestions,andtheend-of-
chapterproblemsprovideamorestructuredtoolfordevelopingstudents’skills.Ourextensiveuse
vii
viii Preface
ofgametheoryisanaturalpartnerforour“problem-solving”approachtotheteachingofindustrial
organization.Ouremphasisisnotonlyonacquiringfamiliaritywiththestateofknowledge,butalso
onanintegratedunderstandingofindustrialorganization—howtoanalyzeandthinklogicallyabout
firmbehaviorusingtheconceptualtoolswedevelop.Ourgoalwastowriteatextbookthatputthe
emphasisonthedevelopmentofstudents’analyticalabilities.
Key Features of IOSA
Chapter1offersanoverviewofthebookalongwithadiscussionofthemethodologycurrentlyused
inthestudyofindustrialorganization.ThedistinctivefeaturesofIOSAareasfollows:
•
Anemphasisonstrategicbehaviorasanorganizingprincipleforunderstandingnonpricecom-
petition.Thereareseparate,chapter-lengthtreatmentsofstrategicbehavior,entrydeterrence,
two-stagegames,advertising,productdifferentiation,andR&D.
•
Comprehensivecoverageandextendedtreatmentsofsuchrecentdevelopmentsasincomplete
contracts,propertyrights,andtheboundariesofthefirm;durablegoodsmonopoly;nonlinear
pricing;addressmodelsofproductdifferentiation;supergames,tacitcollusion,andfacilitating
practices;thenewempiricalindustrialorganization;theefficientcomponentpricingruleand
access pricing; regulatory and industry restructuring in network industries; and regulation
underasymmetricinformation.
•
An unmistakable and unique emphasis on antitrust, from using antitrust cases to illustrate
theory to separate, up-to-date chapter-length treatments of market definition, raising rivals’
costs,predatorypricing,horizontalmergers,andverticalrestraints.
•
An accessible development and presentation of theory through the use of simple, explicit
functionalforms,numericexamples,and/orgraphicalinterpretations.Thetextworksthrough
thedetailsofsimplifiedmodels,thelogicofthearguments,andtheconclusions.Theapproach
isrigorouswithoutusingmathematicsbeyondthatofhighschoolalgebra.Apriorcoursein
intermediatemicroeconomicsisanadvantagebutnotarequirement.
•
Theapplicabilityandpoweroftheoryinunderstandingfirmbehaviorandmarketoutcomes
isestablishedwithextensivecasestudiesandexamples,allintegratedintothediscussionina
waythatenablesstudentstomaketheleapfromtheorytopractice.
•
Carefulattentiontopedagogyandextensiveeffortstomakethestudyofindustrialorganization
interestingandrewarding.Extensivepedagogyincludeschapter-openingvignettes;highlight-
ing of key terms; two-color diagrams; integrated cases, examples, and numeric exercises;
suggestionsforfurtherreadingthatprovidedetailedguidestotheliteratureandfrontierde-
velopments; and extensive end-of-chapter materials—summaries, problems, and discussion
questions.
IOSA is supported by two ancillaries—an instructor’s manual and a Web site. The instructor’s
manualprovidessolutionstoallproblemsaswellassuggestionsforin-classexercises.Solutionsto
theproblemswereablypreparedbyDavidKrauseattheUniversityofCalgaryandbyAndreaWilson
and Alexendra Lai at Queen’s University. The Web site (www.mhhe.com/economics/churchware)
provideslinkstoantitrustandregulationsites;updates;andreportsonsignificantdevelopmentsthat
illustrateindustrialorganizationinaction.
Preface ix
“Menus” of Chapters for One- and Two-Semester Courses
IOSAprovidescomprehensivecoverageofindustrialorganization.ThedepthandbreadthofIOSA’s
coverage provides instructors with considerable flexibility to select material appropriate for their
needs.Foraone-semestercourseinindustrialorganizationrecommendedcorechaptersare1,2,3
(Section 3.1 only), 4 (Section 4.1 only), 5, 7, 8, 9, 10, 13, 14, and 15. Depending on the interests
oftheinstructorandtimeavailable,threeorfouradditionalchapterscantypicallybecovered.Fora
two-semestercourseinindustrialorganizationrecommendedcorechaptersare1,2,3,4,5,7,8,9,
10,11,13,14,15,18,20,21,22,23,24,25,and26.Foraone-semestercoursewithanemphasison
antitrustapossiblecoursesequenceisChapters1,2,4(Sections4.1and4.2),7,8,9,10,13,14,19,
20,21,22,and23.Foraone-semestercoursewithanemphasisonregulatoryeconomicsapossible
coursesequenceisChapters1,2,3,4(Section4.1only),5,7,8,9,13,24,25,and26.