Industrial Organization: Markets and Strategies

726 Pages·2010·3.318 MB·English

by  Belleflamme P., Peitz M.

IndustrialOrganization
IndustrialOrganization:MarketsandStrategiesprovidesanup-to-dateaccountofmodern
industrialorganizationthatblendstheorywithreal-worldapplications.Writteninaclearand
accessiblestyle,itacquaintsthereaderwiththemostimportantmodelsforunderstanding
strategieschosenbyfirmswithmarketpowerandshowshowsuchfirmsadapttodifferent
marketenvironments.Itcoversawiderangeoftopicsincludingrecentdevelopmentson
productbundling,brandingstrategies,restrictionsinverticalsupplyrelationships,intellectual
propertyprotectionandtwo-sidedmarkets,tonamejustafew.Modelsarepresentedindetail
andthemainresultsaresummarizedaslessons.Formaltheoryiscomplementedthroughout
byreal-worldcasesthatshowstudentshowitappliestoactualorganizationalsettings.The
bookisaccompaniedbyawebsitecontaininganumberofadditionalresourcesforlecturers
andstudents,includingexercises,solutionstoexercisesandslides.
Companionwebsiteatwww.cambridge.org/belleflamme.
PaulBelleflammeisProfessorofEconomicsattheUniversite´ catholiquedeLouvain,
Belgium.Hehaspublishedseveralarticlesinleadingeconomicsjournalsandteachescourses
inthefieldsofindustrialorganizationandmanagerialeconomics.
MartinPeitzisProfessorofEconomicsattheUniversityofMannheim,Germany.Hehas
publishedwidelyinleadingeconomicsjournalsand,withPauldeBijl,istheauthorof
RegulationandEntryintoTelecommunicationsMarkets(CambridgeUniversityPress,2003).

Industrial
Organization
Markets and Strategies
Paul Belleflamme
Universite´ catholiquedeLouvain
Martin Peitz
UniversityofMannheim
CAMBRIDGE UNIVERSITY PRESS
Cambridge,NewYork,Melbourne,Madrid,CapeTown,Singapore,Sa˜oPaulo,
Delhi, Mexico City
CambridgeUniversityPress
TheEdinburghBuilding,CambridgeCB28RU,UK
PublishedintheUnitedStatesofAmericabyCambridgeUniversityPress,NewYork
www.cambridge.org
Informationonthistitle:www.cambridge.org/9780521862998
(cid:1)C PaulBelleflammeandMartinPeitz2010
Thispublicationisincopyright.Subjecttostatutoryexception
andtotheprovisionsofrelevantcollectivelicensingagreements,
noreproductionofanypartmaytakeplacewithoutthewritten
permissionofCambridgeUniversityPress.
Firstpublished2010
4th printing 2012
Printedand bound by MPG Books Group, UK
AcataloguerecordforthispublicationisavailablefromtheBritishLibrary
LibraryofCongressCataloguinginPublicationdata
Belleflamme,Paul.
Industrialorganization:marketsandstrategies/PaulBelleflamme,MartinPeitz.–1sted.
p. cm.
Includesindex.
ISBN978-0-521-68159-9(pbk.)
1.Marketing. 2.Strategicplanning. I.Peitz,Martin. II.Title.
HF5415.B4287 2010
658.4(cid:2)012–dc22 2009047718
ISBN978-0-521-86299-8Hardback
ISBN978-0-521-68159-9Paperback
Additionalresourcesforthispublicationatwww.cambridge.org/industrial organization
CambridgeUniversityPresshasnoresponsibilityforthepersistenceor
accuracyofURLsforexternalorthird-partyInternetwebsitesreferredto
inthispublication,anddoesnotguaranteethatanycontentonsuch
websitesis,orwillremain,accurateorappropriate.
Contents
Listoffigures xiii
Listoftables xv
Listofcases xvi
Preface xix
PartI Gettingstarted 1
IntroductiontoPartI 1
1 WhatisMarketsandStrategies? 3
1.1 Markets 3
1.2 Strategies 6
1.3 ModelsandmaterialofMarketsandStrategies 8
1.4 Level,scopeandorganizationofthebook 9
2 Firms,consumersandthemarket 13
2.1 Firmsandconsumers 13
2.1.1 Thefirm 14
2.1.2 Lookinginsidetheblackboxofafirm 16
2.1.3 Consumersandrationalman 21
2.1.4 Welfareanalysisofmarketoutcomes 24
2.2 Marketinteraction 26
2.2.1 Theperfectlycompetitiveparadigm 26
2.2.2 Strategiesinaconstantenvironment(‘monopoly’) 26
2.2.3 Dominantfirmmodel 29
2.2.4 Imperfectcompetition 32
2.3 Marketdefinitionandmarketperformance 33
2.3.1 Howtodefineamarket? 33
2.3.2 Howtoassessmarketpower? 34
NotesforPartI 38
ReferencesforPartI 39
PartII Marketpower 41
IntroductiontoPartII 41
3 Staticimperfectcompetition 45
3.1 Pricecompetition 45
3.1.1 ThestandardBertrandmodel 45
3.1.2 Pricecompetitionwithuncertaincosts 47
3.1.3 Pricecompetitionwithdifferentiatedproducts 49
3.1.4 Asymmetriccompetitionwithdifferentiatedproducts 52
vi Contents
3.2 Quantitycompetition 54
3.2.1 ThelinearCournotmodel 54
3.2.2 ImplicationsofCournotcompetition 58
3.3 Priceversusquantitycompetition 59
3.3.1 Limitedcapacityandpricecompetition 60
3.3.2 Differentiatedproducts:CournotversusBertrand 64
3.3.3 Whatistheappropriatemodellingchoice? 66
3.4 Strategicsubstitutesandstrategiccomplements 67
3.5 Estimatingmarketpower 70
4 Dynamicaspectsofimperfectcompetition 75
4.1 Sequentialchoice:Stackelberg 75
4.1.1 Oneleaderandonefollower 76
4.1.2 Oneleaderandanendogenousnumberoffollowers 79
4.1.3 Commitment 80
4.2 Freeentry:endogenousnumberoffirms 81
4.2.1 Propertiesoffree-entryequilibria 82
4.2.2 TheCournotmodelwithfreeentry 83
4.2.3 Pricecompetitionwithfreeentry 85
4.2.4 Monopolisticcompetition 87
4.3 Industryconcentrationandfirmturnover 91
4.3.1 Exogenousversusendogenoussunkcosts 91
4.3.2 Dynamicfirmentryandexit 97
NotesforPartII 103
ReferencesforPartII 104
PartIII Sourcesofmarketpower 107
IntroductiontoPartIII 107
5 Productdifferentiation 111
5.1 Viewsonproductdifferentiation 112
5.2 Horizontalproductdifferentiation 113
5.2.1 Asimplelocationmodel 113
5.2.2 ThelinearHotellingmodel 115
5.2.3 ThequadraticHotellingmodel 118
5.3 Verticalproductdifferentiation 120
5.3.1 Qualitychoice 120
5.3.2 Naturaloligopolies 123
5.4 Empiricalanalysisofproductdifferentiation 125
5.4.1 Probabilisticchoiceandthelogitmodel 126
5.4.2 Empiricalanalysisofhorizontalproductdifferentiation 129
5.4.3 Empiricalanalysisofverticalproductdifferentiation 130
5.4.4 Nestedlogitandotherextensions 131
vii Contents
6 Advertisingandrelatedmarketingstrategies 135
6.1 Viewsonadvertising 135
6.2 Priceandnon-pricestrategiesinmonopoly 139
6.2.1 Price–Advertisingdecisions:theDorfman–Steinermodel 139
6.2.2 Acloserlookathowadvertisingaffectsdemand 141
6.3 Somewelfareeconomicsofadvertising 142
6.4 Advertisingandcompetition 144
6.4.1 Informativeadvertising 144
6.4.2 Persuasiveadvertising 149
7 Consumerinertia 157
7.1 Uninformedconsumersandsearchcosts 157
7.1.1 Pricedispersion 158
7.1.2 Consumersearch 163
7.1.3 Empiricalinvestigationofpricedispersion 165
7.2 Switchingcosts 167
7.2.1 Competitiveeffectsofswitchingcosts 167
7.2.2 Couponsandendogenousswitchingcosts 176
7.2.3 Estimatingswitchingcosts 179
7.3 Customerpoaching 181
NotesforPartIII 188
ReferencesforPartIII 190
PartIV Pricingstrategiesandmarketsegmentation 193
IntroductiontoPartIV 193
8 Grouppricingandpersonalizedpricing 195
8.1 Pricediscrimination 195
8.1.1 Pricediscrimination:atypology 195
8.1.2 ‘Knowthycustomers’ 197
8.2 Groupandpersonalizedpricinginmonopoly 198
8.3 Groupandpersonalizedpricinginoligopolies 201
8.3.1 Grouppricingandlocalizedcompetition 201
8.3.2 Personalizedpricingandlocationdecisions 207
8.3.3 Geographicpricediscrimination 208
9 Menupricing 217
9.1 Menupricingversusgrouppricing 217
9.2 Aformalanalysisofmonopolymenupricing 219
9.2.1 Quality-dependentprices 219
9.2.2 Informationgoodsanddamagedgoods 224
9.2.3 Extensiontotime-andquantity-dependentprices 226
9.3 Menupricingunderimperfectcompetition 227
9.3.1 Competitivequality-basedmenupricing 228
9.3.2 Competitivequantity-basedmenupricing 234
viii Contents
10 Intertemporalpricediscrimination 239
10.1 Durablegoodmonopolywithoutcommitment 239
10.1.1Smallnumberofconsumers 240
10.1.2Largenumberofconsumers 243
10.2 Durablegoodmonopolywithcommitment 247
10.2.1Fixedcapacities 248
10.2.2Flexiblecapacity 250
10.2.3Intertemporalpricinganddemanduncertainty 251
10.3 Behaviour-basedpricediscrimination 255
11 Bundling 259
11.1 Aformalanalysisofmonopolybundling 260
11.1.1Purebundlingasadevicetoofferadiscount 261
11.1.2Mixedbundling 264
11.1.3Extensions 265
11.2 Tyingandmetering 269
11.3 Competitivebundling 272
11.3.1Bundlingasawaytosoftenpricecompetition 272
11.3.2Whenbundlingintensifiespricecompetition 274
NotesforPartIV 279
ReferencesforPartIV 280
PartV Productqualityandinformation 283
IntroductiontoPartV 283
12 Asymmetricinformation,priceandadvertisingsignals 285
12.1 Asymmetricinformationproblems 285
12.1.1Hiddeninformationproblem 285
12.1.2Hiddenactionproblem 289
12.2 Advertisingandpricesignals 292
12.2.1Advertisingsignals 292
12.2.2Pricesignals 296
12.2.3Jointpriceandadvertisingsignals 303
12.3 Pricesignallingunderimperfectcompetition 305
13 Marketingtoolsforexperiencegoods 309
13.1 Warranties 309
13.1.1Warrantiesasareliabilitysignal 310
13.1.2Warrantiesandinvestmentinqualitycontrol 312
13.2 Branding 314
13.2.1Intertemporalbrandingandreputation 316
13.2.2Reputationandcompetition 317
13.2.3Umbrellabranding 320
NotesforPartV 327
ReferencesforPartV 328