Industrial Economics Course Notes

Course Overview

• Instructor Details:
  • Lecturer: Adelina Gschwandtner
  • Office: Sibson 252/Teams
  • Email: A.Gschwandtner@kent.ac.uk
  • Consultation Hours:
  • Monday: 5-6pm
  • Tuesday: 4-5pm
  • Email appointment required

Student Learning Mindset

• Key Mindset:

  • Students who adopt a growth mindset tend to work harder, learn more, get smarter, and ultimately achieve better marks and test scores.
  • Focus on continuous improvement.

• Learning Purpose:

  • Are students here to truly learn, or simply to imitate?
  • Important: School policy discourages the provision of answers to past exam papers.

Definition of Industrial Economics

• What is Industrial Economics?

  • Application of microeconomic theory to analyze firms, markets, and industries with imperfect competition.

• Course Objectives:

  • Provide a framework for:
  • Explaining firm behavior.
  • Assessing welfare consequences.
  • Discussing policy implications.
  • Relevant for career paths in management, consulting, and policymaking.
  • Supports studies in related economics fields like Macroeconomics and International Economics.

Learning Outcomes

• By the end of the course, students will be able to:
  • Explain and model firms' decisions on price, advertising, and R&D.
  • Evaluate the impact of these decisions on market structure and performance.
  • Understand and apply game theory concepts to analyze strategic behavior of firms.
  • Identify implications of theoretical frameworks for designing and implementing industrial policy.
  • Construct economic arguments and critically analyze others' arguments.

Assessment Criteria

• Two Components:
  1. Coursework: 20%
  • Online quiz on Moodle (April 1st, 15:30-18:00).
  1. Extended Essay: 80%
  • 4000 words due on May 8th (refer to module outline for questions).

Lecture Programme Overview

• Topics Covered:
  • Theory of Monopoly:
  • Optimal monopoly behavior, welfare analysis, price discrimination.
  • Game Theory and Oligopoly Markets:
  • Includes static games, dynamic games, Cournot and Bertrand competition.
  • Anticompetitive Strategies:
  • Discussion on entry barriers, limit pricing, price-fixing, predatory pricing, and regulations.
  • Mergers and Acquisitions:
  • Differences between horizontal and vertical mergers.
  • Non-price Competition:
  • Advertising, R&D, and patent races.

Lecture 1: Monopoly

• Key Topics:
  • Monopoly behavior, social welfare implications under monopoly, efficiency issues, and the question of government intervention.

Monopoly Efficiency Analysis

• Monopoly Pricing:

  • Price is above marginal cost, depending on the demand elasticity.
  • Objective is profit maximization, with optimal output where marginal revenue (MR) equals marginal cost (MC).

• Social Welfare Considerations:

  • Deadweight loss (DWL) occurs under monopoly.
  • Allocative and productive inefficiencies.

Inefficiencies in Monopoly

• Static Inefficiencies:

  • Allocative:
  • Represents a deadweight loss as monopoly undersupplies compared to the efficient outcome.
  • Productive:
  • Lack of incentive to adopt most efficient technologies.

• Dynamic Inefficiencies:

  • Minimal innovation incentive compared to competitive markets.

Government Intervention Debate

• Should Governments Intervene?
  • Addressing allocative and productive inefficiencies.
  • Evaluating managerial slack and the impact of competition policies.

Market Forces and Monopoly Power

• Theories on Market Forces:
  • Coase's view on durable goods monopolists.
  • Contestable market theory and the role of sunk costs and consumer switching costs in market dynamics.

Recommended Literature

• Key Readings:
  • Caves, R.E., & Bailey, S.D. (1992). Industrial Efficiency in Six Nations. MIT Press.
  • Clerides, S.K. (2002). Intertemporal pricing in the US book market. International Journal of Industrial Organization.
  • Cowling, K., & Mueller, D.C. (1978). The social costs of monopoly power. Economic Journal.
  • Demsetz, H. (1973). Industry structure and public policy. Journal of Law and Economics.
  • Gschwandtner, A., & Lambson, V.E. (2002). Sunk costs and market entry. Economics Letters.
  • Harberger, A.C. (1954). Monopoly and Resource Allocation. American Economic Review.
  • Hay, D.A., & Liu, G.S. (1997). The efficiency of firms. Economic Journal.
  • Klette, T.J. (1999). Market power and productivity estimates. The Journal of Industrial Economics.
  • Leibenstein, H. (1966). Allocative vs. X-efficiency. American Economic Review.
  • Littlechild, S.C. (1981). Social costs of monopoly power. Economic Journal.