Industrial Organization

Lynne Pepall is Professor of Economics and Dean of the Graduate School of Arts and Sciences at Tufts University. Professor Pepall received her undergraduate degree in mathematics and economics from Trinity College, University of Toronto, and her Ph.D. in economics from Cambridge University in England. She has written numerous papers in industrial organization, appearing in the Journal of Industrial Economics, International Journal of Industrial Organization, Journal of Economics and Management Strategy, Economic Journal, Canadian Journal of Economics, Economica, and the American Journal of Agricultural Economics. She has taught industrial organization and microeconomics at both the graduate and undergraduate levels, at Tufts University since 1987. Professor Pepall lives in Newton, Massachusetts, with her two sons, a dog, three rabbits, and her husband, a co-author of this book. Dan Richards is Professor of Economics at Tufts University. Professor Richards received his A.B. in economics and history from Oberlin College and his Ph.D. in economics from Yale University. Professor Richards has written numerous articles in both macroeconomics and industrial organization, appearing in the American Economic Review, Quarterly Journal of Economics, Journal of Industrial Economics, Economica, the B. E. Journals in Economic Analysis and Policy, Canadian Journal of Economics, the Journal of Money, Credit, and Banking, and the American Journal of Agricultural Economics. He came to Tufts in 1985 and has taught at both the graduate and undergraduate levels. He served as Director of the Graduate Program in Economics from 1989 through 1998, and has also served as a consultant to the Federal Trade Commission. From 1996 to 2005 he taught in the Sloan Fellows Program at MIT’s Sloan School of Management. Professor Richards lives in Newton, Massachusetts, with his two sons, a dog, three rabbits, and his wife, a co-author of this book. George Norman holds the William and Joyce Cummings Family Chair of Entrepreneurship and Business Economics at Tufts University. He came to Tufts in 1995 from Edinburgh University, where he had served as head of the department of economics. Prior to that, Professor Norman was the Tyler Professor of Economics at the University of Leicester (England). Professor Norman attended the University of Dundee (Scotland) where he was awarded the M.A. in economics with first class honors. He received his Ph.D. in economics from Cambridge University. His more than 70 published articles have appeared in such professional journals as the American Economic Review, Review of Economic Studies, Quarterly Journal of Economics, Journal of Industrial Economics, and International Journal of Industrial Organization. He is currently an Associate Editor for two journals, the Bulletin of Economic Research and Regional Science and Urban Economics. He is also on the editorial board of the B.E. Journals in Economic Analysis and Policy. In addition to this book, Professor Norman has written and edited, either alone or in collaboration with others, 17 other books. Professor Norman has taught courses in industrial organization and microeconomic theory at both the graduate and undergraduate levels. He has also taught introductory economics, corporate strategy, international economics, and entrepreneurship. Professor Norman lives in Newbury, Massachusetts, with his wife Margaret who, while not a co-author, has provided invaluable support and assistance in his work on this book.

About the Authors v

Preface to the Fifth Edition vii

Part One Foundations 1

1 Industrial Organization: What, How, and Why 2

2 Basic Microeconomics 19

3 Market Structure and Market Power 47

4 Technology and Cost 64

Part Two Monopoly Power in Theory and Practice 91

5 Price Discrimination and Monopoly: Linear Pricing 92

6 Price Discrimination and Monopoly: Nonlinear Pricing 119

7 Product Variety and Quality Under Monopoly 142

8 Commodity Bundling and Tie-In Sales 173

Part Three Strategic Interaction and Basic Oligopoly Models 213

9 Static Games and Cournot Competition 214

10 Oligopolistic Price Competition 242

11 Dynamic Games and First and Second Movers 264

Part Four Anticompetitive Behavior and Antitrust Policy 283

12 Entry Deterrence and Predation 284

13 Predatory Conduct: More Recent Developments 316

14 Price Fixing, Repeated Games, and Antitrust Policy 349

Part Five Contractual Relations Between Firms 385

15 Horizontal Mergers 386

16 Vertical and Conglomerate Mergers 427

17 Vertical Price Restraints 459

18 Non-Price Vertical Restraints 486

Part Six Non-Price Competition 515

19 Advertising, Market Power, and Information 516

20 Research and Development 548

21 Patents and Patent Policy 578

Part Seven Networks, Auctions, and Strategic Policy Commitment 611

22 Network Issues 612

23 Auctions: Basic Theory and Applications 637

24 Strategic Commitments and International Trade 661

Answers to Practice Problems 677

Index 695