This is an overview course in Industrial Organization. We will aim to give a solid grounding in understanding the structure of markets, and the strategic behavior of firms and their consumers. Beyond academic careers, there are clear policy issues (on anti-trust and regulation) and commercial implications (reflected by the growing economics consulting sector, which is based primarily around IO issues including pricing and competitive analysis).
This course aims to familiarize students with theoretical and empirical topics in industrial organization and help students start their own research agendas. In particular, it aims to provide both a broadsweep of some fundamental topics and techniques which any researcher working in IO should be familiar with and to look at some particular topics in greater depth.
We expect all of you to have micro background on the order of what is covered in 701 and econometrics background on the order of what is covered in 703. In addition, this class will require you to be able to program. You are expected to have a working knowledge of MATLAB and STATA, or equivalent software (such as R, Julia, Java, Python, C++, whatever). However, it will be advantageous for you to settle on software that is part of the current equilibrium in economics.
For many of the (theory) classes, we will start by covering material in Tirole’s Theory of Industrial Organization. If you are serious about pursuing IO, this is probably a book that you will want to have on your bookshelf.
For more background reading, if you want things to flick through at bedtime, some nice undergraduate texts include Carlton and Perloff Modern Industrial Organization, Oz Shy Industrial Organization and Luis Cabral Introduction to Industrial Organization.
Allan Collard-Wexler: Sign up for office hours on website (https://collardwexler.youcanbook.me).
Daniel Xu: Sign up for office hours on website.
- Participation: where the syllabus lists a paper with a star next to it, this indicates reading is required before class. This paper will be discussed in class and an inability to discuss the paper will reflect badly on you and, more importantly, you won’t get much from the class.
- Presentation: You will be asked to present a paper during the class. The presenter will be chosen randomly.
- Problem Sets: three problem sets will be given. To really understand a topic, you need to be able to replicate some of the work. Students can work on problem sets in groups with at most 3 members.
On Learning and Doing IO
Like everything else, the secret to a successful research or professional career in IO is practice, practice, practice. However, like everything else in life this is a constrained problem (even if you don’t sleep at night). We suggest, read papers ahead of time, read them after and make sure you understand them (for theory, this might involve writing down the structure model, making sure you can identify and understand key steps in proofs etc). Discuss them with your friends, what questions does this work lead you to ask. What is good/convincing/insightful? Where does it leave you unsatisfied? Think about these questions first (and think might mean mulling over a period of days and weeks) before chasing through the literature. You are more likely to come up with something original if you haven’t already read 57 loosely related papers around the subject and if there is a gap then thinking about the issues beforehand, should help you find that rather than staring at the literature and trying to figure out where it is..
Outside of classwork, we strongly recommend that you attend the IO-Public seminar which runs on Tuesday afternoons, this will give you a sense of where the frontier is, and will give you an insight into how the process of research actually works (rather than seeing the culmination of that process). Finally, reading a newspaper with good business coverage is an important habit. Duke has a free subscription to the Wall Street Journal for instance.
The schedule is tentative and subject to change. Readings that have a * are required, while the others are not, but if you do IO as a field, you will likely end up reading these sooner or later.
- 27 August. IO Overview: themes and history, theory and empirics. Issues from looking at correlations between market power and outcomes. Simple theory of imperfect competition: Bertrand, Cournot, Stackelberg.Readings:
- *Schmalensee “On a Level with Dentists? Reflections on the Evolution of Industrial Organization” Review of Industrial Organization 41.3 (2012), pp 157-179.
- Einav and Levin. “Empirical Industrial Organization: A Progress Report.” Journal of Economic Perspectives 24.2 (2010), pp.145-162.
- Bresnahan, Tim “Empirical Studies with Market Power.” Handbook of Industrial Organization, vol. II, chap. 17.
- *Tirole, Jean. “Market Failures and Public Policy.” American Economic Review 105.6 (2015), 1665-82 .
- *Berry, Steven and Gaynor, Martin and Morton, Fiona Scott “Do Increasing Markups Matter? Lessons from Empirical Industrial Organization” Journal of Economic Perspectives, 33 (2019), pp. 44–68.
- *Tirole, Jean “Theory of Industrial Organization”, Monopoly 62-69, and Cournot-Bertrand page 204-237.
- Chandler, Alfred D. “The Visible Hand: The Managerial Revolution in American Business” Harvard University Press, 1977.
- Sutton, John. “Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration.” MIT Press Books 1 (2007).
- IO Theory Notes (IO handout)
- 29 August: Bresnahan Oligopoly Solution. Horizontal Mergers. Tacit Collusion.Readings:
- *Tirole. pp 209-224.
- *Bresnahan, T (1982) “The oligopoly solution concept is identified”, Economic Letters, Vol 10(1): 87-92.
- Williamson, O. E.. “Allocative Efficiency and the Limits of Antitrust.” The American Economic Review 59.2 (1969): 105-118.
- Horizontal Mergers: An Equilibrium Analysis Joseph Farrell and Carl Shapiro The American Economic Review Vol. 80, No. 1 (Mar., 1990), pp. 107-126
- U.S. Department of Justice. (1997). “Horizontal Merger Guidelines.”
- *Whinston, M. D. (2006). Lectures on Antitrust Economics, MIT Press (chapter 2 on Horizontal Mergers).
- Tirole on Tacit Collusion
- Demand Estimation Notes (890_Demand_2019)
- 3 September: Demand Estimation. Why estimate demand. Product Differentiation Models: vertical versus horizontal. AIDS Models. BLP. Readings:
- Anderson, Simon P., Andre de Palma, and Jacques-Francois Thisse (1992): Discrete Choice Theory of Product Differentiation, Cambridge, MA: The MIT Press.
- Caplin, A., and B. Nalebuff, “Aggregation and Imperfect Competition: On the Existence of Equilibrium.” Econometrica 59 (1991).: 25-60.
- Hausman, J., G. Leonard, et al. “Competitive Analysis with Differentiated Products.” Annales D’Economie et de Statistique 34.2 (1994): 159-80.
- Goldberg, Pinelopi Koujianou. “Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry.” Econometrica, 63 (1995), 891-951.
- *Goldberg, P and S. Chaudhuri and P. Jia “Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India” American Economic Review 96.5 (2006), 1477-1514.
- *Berry, S. “Estimating Discrete-Choice Models of Product Differentiation” The RAND Journal of Economics, Vol. 25, No. 2 (Summer, 1994), pp. 242-262
- *Berry, S. and Levinsohn, J. and Pakes, A. “Automobile Prices in Market Equilibrium”, Econometrica, 63.4 (1995), pp. 841-890.
- Bresnahan, T. “Competition and Collusion in the American Automobile Oligopoly: The 1955 Price War”The Journal of Industrial Economics, Vol. 35, No. 4, The Empirical Renaissance in Industrial Economics (Jun., 1987), pp. 457-482
- TF Bresnahan, S Stern, M Trajtenberg “Market Segmentation and the Sources of Rents from Innovation: Personal Computers in the Late 1980s”, RAND Journal of Economics 28.0 (1997), S17-S44.
- Deaton and Muellbauer. “An Almost Ideal Demand System” American Economic Review 70.3 (1980), 312-326.
- * Nevo, Aviv. “Measuring Market Power in the Ready-to-Eat Cereal Industry”, Econometrica, Vol. 69, No. 2 (Mar., 2001), pp. 307-342.
- *Petrin, Amil. “Quantifying the Benefits of New Products: The Case of the Minivan”, Journal of Political Economy 110.4 (2002), 705-729
- Rasmusen Notes on BLP (http://www.rasmusen.org/published/blp-rasmusen.pdf)
- *Nevo, A. “Mergers with differentiated products: The case of the ready-to-eat cereal industry.” Rand Journal of Economics 31.3 (2000): 395-421.
- Nevo, Aviv. “A practitioner’s guide to estimation of random coefficients logit models of demand.” Journal of economics & management strategy 9.4 (2000): 513-548.
- Hendel, Igal, “Estimating Multiple Discrete Choice Models: An Application to Computerization Returns”, Review of Economic Studies vol. 66 (1999): 423-446.
- Gentzkow, Matthew, “Valuing New Goods in a Model with Complementarities: Online Newspapers”, American Economic Review 97.3 (2007), 713-744.
- Train, Kenneth E. Discrete choice methods with simulation. Cambridge university press, 2009.
- 5 September:
- 10 September:
- 12 September:Gains from New Variety (Lecture Note)Applications of AIDS. Applications of BLP.Readings:
- Hausman, Jerry, “Valuation of New Goods Under Perfect and Imperfect Competition,” in Bresnahan and Gordon (eds.), The Economics of New Goods, NBER Studies in Income and Wealth vol. 58 (1996): 209-237
- Trajtenberg, Manuel, “The Welfare Analysis of Product Innovation, with an Application to CT Scanners,” Journal of Political Economy vol. 97 (1989): 444-479
- Petrin, Amil, “Quantifying the Benefits of New Products: The Case of The Minivan,” Journal of Political Economy vol. 110 (2002): 705-729
- Gentzkow, Matthew, “Valuing New Goods in a Model with Complementarities: Online Newspapers,” American Economic Review 97.3 (2007), 713-744
- Problem Set 1: BLP Estimation
- Problem Set Description (Problem_1_Phd_IO_2019).
- Data for the Problem Set (OTC_Data)
- Starter Code from Aviv Nevo (Student_Starter_Code_BLP)
- Read: Aviv Nevo (2000) “A Practitioner’s Guide to Estimation of Random‐Coefficients Logit Models of Demand” (RAs_guide)Journal of Economics and Management Strategy.
- 17 September: Price discrimination (Price Discrimination)
- Shepard, Andrea, “Price Discrimination and Retail Configuration,” Journal of Political Economy 99.1 (1991): 30-53.
- Borenstein, Severin and Nancy Rose, “Competition and Price Dispersion in the U.S. Airline Industry,” Journal of Political Economy, 102.4 (1994): 653-683.
- International Price Discrimination in the European Car Market Frank Verboven, RAND Journal of Economics, 27.2 (1996), 240-268.
- Leslie, Philip, “Price Discrimination in Broadway Theatre,” Rand Journal of Economics, 35.3 (2004): 520-540.
- 19 September: Vertically related markets. Double marginalization. Other theories of vertical integration. (Vertical)Readings:
- *Tirole. Pages 169-186.
- George P Baker, Thomas N Hubbard (2003) “Make versus buy in trucking: asset ownership, job design, and information” American Economic Review, Vol 93(3), pp. 551-572.
- Lafontaine, Francine, and Margaret Slade. “Vertical integration and firm boundaries: The evidence.” Journal of Economic Literature 45.3 (2007): 629-685.
- Januszewski Forbes, Silke, and Mara Lederman. “Adaptation and vertical integration in the airline industry.” American Economic Review 99.5 (2009): 1831-49.
- Hart, Oliver. Firms, contracts, and financial structure. Clarendon press, 1995.
- 24 September: Bargaining TheoryReadings:
- *Horn, Henrick, and Asher Wolinsky. “Bilateral monopolies and incentives for merger.” The RAND Journal of Economics, 19.3 (1988): 408-419.
- Collard-Wexler, Allan, Gautam Gowrisankaran, and Robin S. Lee. “Nash-in-Nash bargaining: a microfoundation for applied work.” Journal of Political Economy, 127.1 (2019): 163-195.
- Shaked, Avner, and John Sutton. “Involuntary unemployment as a perfect equilibrium in a bargaining model.” Econometrica, 52.6 (1984): 1351-1364.
- 26 September: CANCELLEDProblem Set 2: IO Theory: Vertical Issues.
- October 1.Readings: (empirical_bargaining_vertical)
- *Grennan, Matthew. “Price Discrimination and Bargaining: Empirical Evidence from Medical Devices.” American Economic Review 103.1 (2013): 145-177.
- *Gautam, Gowrisankaran, Aviv Nevo, and Robert Town. “Mergers When Prices Are Negotiated: Evidence from the Hospital Industry.” American Economic Review 105.1 (2015): 172-203.
- Crawford, Gregory S. and Ali Yurukoglu. “The Welfare Effects of Bundling in Multichannel Television Markets.” American Economic Review 102.2 (2012): 643-685.
- Crawford, Gregory S., Robin S. Lee, Michael D. Whinston, and Ali Yurukoglu. “The Welfare Effects of Vertical Integration in Multichannel Television Markets.” Econometrica 86.3 (2018): 891-954.
- Ho, Kate, and Robin S. Lee. “Insurer Competition in Health Care Markets.” Econometrica 85.2 (2017): 379-417.
- Ho, Kate, and Robin S. Lee. “Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets.” American Economic Review 109.2 (2019): 473-522.
4. Dynamic demand
- October 3. Review of single agent dynamics. Storable goodsReadings:
- Aguirregabiria and Mira, “Dynamic discrete choice structural models: A survey”, Journal of Econometrics, 156.1 (2010): 38-67
- Aguirregabiria, Victor and Aviv Nevo. “Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games” Advances in Economics and Econometrics: Theory and Applications: Tenth World Congress, 2013
- *Hendel, I. and Nevo, A., “Measuring the Implications of Sales and Consumer Stockpiling Behavior”, Econometrica, Vol. 74, No. 6 (Nov., 2006), 1637-1673
- October 10.Durable goods, :Coase ConjectureReadings:
- Bulow, J., “Durable Goods Monopolists. ” Journal of Political Economy, Vol. 90, No. 2 (Apr., 1982), pp. 314-332
- Waldman, M., “Durable Goods Theory for Real World Markets”, The Journal of Economic Perspectives, Vol. 17, No. 1 (Winter, 2003), pp. 131-154
- *Gowrisankaran, G. and Rysman, M., “Dynamics of Consumer Demand for New Durable Goods”, Journal of Political Economy, Vol. 120, No. 6 (December 2012), pp. 1173-1219
- October 13. Consumer learningReadings:
- Ackerberg D., “Advertising, Learning, and Consumer Choice in Experience Good Markets: A Structural Empirical Examination”, International Economic Review, Vol. 44, No. 3 (Aug., 2003), pp. 1007-1040
- *Crawford, G., and Shum, M., “Uncertainty and Learning in Pharmaceutical Demand”, Econometrica, 73, July 2005, 1135-1174
- Grubb, M. D. and Osborne, M. “Biased beliefs, learning, and bill shock.” The American Economic Review, 105.1 (2014): 234-271
- Einav, L., Finkelstein, A., and Schrimpf, P. “The response of drug expenditure to nonlinear contract design: evidence from Medicare Part D.” The Quarterly Journal of Economics, 130.2 (2015): 841-899.
- Nevo, A., Turner, J. L., and Williams, J. W. “Usage-based pricing and demand for residential broadband.” Econometrica, 84.2 (2016): 411-443
- October 17. Dynamic oligopoly modelsReadings:
- Jovanovic, B., “Selection and the Evolution of Industry”, Econometrica, Vol. 50, No. 3 (May, 1982), pp. 649-670
- Dunne, T., Roberts, M. and Samuelson, L., “The Growth and Failure of U.S. Manufacturing Plants”, The Quarterly Journal of Economics, Vol. 104, No. 4 (Nov., 1989), pp. 671-698
- Hopenhayn, H., “Entry, Exit, and Firm Dynamics in Long Run Equilibrium”, Econometrica, 1992, 1127-1150
- Asplund M. and Nocke, V., “Firm Turnover in Imperfectly Competitive Markets”, Review of Economic Studies, 73.2 (2006), 295-327.
- Nocke, Volker, and Nicolas Schutz. “Multiproduct-firm oligopoly: An aggregative games approach.” Econometrica 86.2 (2018): 523-557.
- October 22.Readings:
- Doralzelski, U. and Pakes, A., “A Framework for Applied Dynamic Analysis in IO”, Harvard
- Ericson, R. and Pakes, A., “Markov-Perfect Industry Dynamics: A Framework for Empirical Work”, The Review of Economic Studies, 62 (1), 1995, 53-82
- October 24.Readings:
- *Pakes, A. and McGuire, P., “Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model”, The RAND Journal of Economics, Vol. 25, No. 4 (Winter, 1994), pp. 555-589
- Benkard, L., “A Dynamic Analysis of Wide-bodied Commercial Aircraft”, Review of Economic Studies. 2004, Vol. 71, Issue 3, Pages 581-611
- *Pakes, A. and McGuire, P., “Stochastic Algorithms, Symmetric Markov-Perfect Equilibrium, and the Curse of Dimensionality”, Econometrica, 69 (5), 2001, 1261-1281
- Weintraub, G.Y., C.L. Benkard, and B. Van Roy, “Markov Perfect Industry Dynamics with Many Firms,” Econometrica, Vol. 76, No. 6 (November, 2008), 1375-1411
- Ifrach, B., and G.Y. Weintraub, “A Framework for Dynamic Oligopoly in Concentrated Industries,” The Review of Economic Studies, Vol 84, No. 3 (2017), 1106-1150
- October 29. Conditional Choice Probability Estimation for Games.(estimating_dynamic_games)Estimation: CCP Estimation.Readings:
- Hotz, V. Joseph, and Robert A. Miller. “Conditional Choice Probabilities and the Estimation of Dynamic Models.” The Review of Economic Studies 60.3 (1993): 497-529.
- Hotz, V. Joseph, Robert A. Miller, Seth Sanders, and Jeffrey Smith. “A Simulation Estimator for Dynamic Models of Discrete Choice.” The Review of Economic Studies 61.2 (1994): 265-289.
- *Bajari, Patrick, C. Lanier Benkard, and Jonathan Levin. “Estimating Dynamic Models of Imperfect Competition.” Econometrica 75.5 (2007): 1331-1370.
- Pakes, Ariel, Michael Ostrovsky, and Steven Berry. “Simple estimators for the parameters of discrete dynamic games (with entry/exit examples).” RAND Journal of Economics 38.2 (2007): 373-399.
- Aguirregabiria, Victor and Pedro Mira. “Sequential Estimation of Dynamic Discrete Games.” Econometrica 75.1 (2007): 1-53.
- *Benkard, C. Lanier, Aaron Bodoh-Creed, and John Lazarev. “Simulating the dynamic effects of horizontal mergers: Us airlines.” Manuscript, Yale University (2010).
- Collard-Wexler, Allan. “Demand Fluctuations in the Ready-Mix Concrete Industry.” Econometrica 81.3 (2013): 1003-1037.
- Ryan, Stephen P. “The Costs of Environmental Regulation in a Concentrated Industry.” Econometrica 80.3 (2012): 1019-1061.
- Igami, Mitsuru. “Estimating the Innovator’s Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981-1998.” Journal of Political Economy 125.3 (2019).
- Kalouptsidi, Myrto. “Time to Build and Fluctuations in Bulk Shipping.” American Economic Review 104.2 (2014): 564-608.
- October 31.Problem Set 3: Productivity and Dynamics
- November 5
- November 7Readings:
- Fabrizio et al, “Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency” American Economic Review 97.4 (2007): 1250-1277.
- *Benkard, L., “Learning and Forgetting: The Dynamics of Aircraft Production” The American Economic Review, Vol. 90, No. 4 (Sep., 2000), pp. 1034-1054
- November 12Readings:
- Richard Blundell & Stephen Bond, “GMM Estimation with Persistent Panel Data: An Application to Production Functions”, IFS Working Papers W99/04, Institute for Fiscal Studies (1999).
- Olley, S. and Pakes, A., “The Dynamics of Productivity in the Telecommunications Equipment Industry”, Econometrica, 64 (6), 1996, 1263-1297
- Levinsohn, J. and Petrin, A., “Estimation Production Functions using Inputs to Control for Unobservables”, The Review of Economic Studies, Vol. 70, No. 2 (Apr., 2003), pp. 317-341
- Ackerberg, D., Caves, K. and Frazer, G., “Structural Identification of Production Functions”, Econometrica, 83.6 (2015), 2411-2451
- Gandhi A., Navarro S., Rivers D., “On the Identification of Gross Output Production Functions”, conditionally accepted by the Journal of Political Economy
- November 14Readings:
- Collard-Wexler, Allan, and Jan De Loecker. “Reallocation and technology: Evidence from the US steel industry.” American Economic Review 105.1 (2015): 131-71.
- Collard-Wexler, Allan, and Jan De Loecker. Production function estimation with measurement error in inputs. No. w22437. National Bureau of Economic Research, 2016.
- November 19Readings:
- Syverson, Chad “What Determines Productivity?” Journal of Economic Literature, 49.2 (2011): 326- 365
- Aw, B, Roberts, M, and Xu, D.Y, “R&D, Exporting, and Productivity Dynamics”, The American Economic Review, Vol. 101, No. 4 (JUNE 2011), pp. 1312-1344
- Goettler, R., and Gordon, B., “Does AMD Spur Intel to Innovate More?”, Journal of Political Economy 119.6 (2011), 1141-1200
- Bloom, Nicholas, and John Van Reenen, “Measuring and Explaining Management Practices across Firms and Countries.” Quarterly Journal of Economics, 122.4 (2007): 1351-1408
- November 21 OPEN
- November 26 OPEN