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Syllabus Overview

  • Course Title: Economics of Business and Markets

  • Instructor: Professor Mateus Dias

Course Topics

  • Topic 1: Market Structure and Market Power

    • Readings: Cabral, Chap. 9; Besanko et al., Chap. 8

  • Topic 2: Collusion

    • Readings: Cabral, Chap. 8; Besanko et al., Chap. 8

  • Topic 3: Pricing

    • Readings: Cabral, Chap. 10; C&P, Caps 9 and 10

  • Topic 4: Product Differentiation

    • Readings: Cabral, Chap. 12; Besanko et al., Cap. 8; C&P, Cap. 7

  • Topic 5: Strategic Behavior, Entry and Exit

    • Readings: Cabral, Chap. 15; Besanko Chap. 11

Required Readings

  • Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2017). Economics of Strategy, 7th edition, Wiley.

  • Cabral, L. (2017). Introduction to Industrial Organization, 2nd edition, MIT Press.

  • Carlton, D., & Perloff, J. (2004). Modern Industrial Organization, 4th edition, Addison-Wesley.

Grading Criteria

  • Assignments: 50%

    • Includes 2 Problem Sets, completed in groups of 4-5

  • Final Exam: 50% (closed book)

Assignment Policies

  • Problem sets aim to reinforce lecture material; understanding solutions is crucial for exam preparation.

  • Late submissions will not be accepted to ensure fairness among students.

Student Conduct Guidelines

  • Attend lectures regularly with seating consistency and name tags.

  • Arrive on time; late arrivals disrupt class.

  • Mobile devices should be silent, laptops permitted for note-taking only.

  • Be prepared to discuss readings and answer questions in class.

Market Structure and Market Power Overview

Definitions

  • Market Structure: Refers to the characteristics of a market, including the number and size of firms.

  • Competitive Constraints: The set of products and locations that influence a firm's pricing and output decisions.

Market Definition Factors

Identifying Competitors

  • Competitor definition through substitute production; assessed via Cross-Price Elasticity of Demand.

Characteristics of Substitutes

  1. Performance: Similar characteristics may imply substitution.

  2. Occasion of Use: Different usage scenarios may affect substitution.

  3. Geographic: Distance and transportation costs influence market substitutes.

Product Market Definition

  • Product Market: Consists of suppliers producing either identical or closely substitutable products.

  • Demand Elasticity: High cross-price elasticity indicates close substitute relationships.

Geographic Market Definition

  • Defined by the effect of price changes in one area affecting demand in another.

Relevant Market Concept

  • Antitrust Agencies: Define relevant market to prevent anti-competitive practices.

  • SSNIP Test: Tests market definition by evaluating the profitability of price increases in a hypothetical monopoly setting.

Market Definition Challenges

  • Difficult due to product differentiation and dynamic market structures. Examples include various soft drink classifications.

Measuring Market Structure

Concentration Indexes

  • k-Firm Concentration Ratio: Sums the market shares of the k largest firms.

  • Herfindahl-Hirschman Index (HHI): Sum of squared market shares of all firms; sensitive to changes in large firm sizes.

Industry Examples

  • Relevant industry concentration calculated for various sectors including airlines, beverages, and electronics, highlighting HHI values.

Conclusion

  • Market definition and structure are crucial in economics for assessing competition, regulatory implications, and business strategy.