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Industrial economics EC3099

This course provides an introduction to current theory and empirical work in Industrial economics.

It starts by examining the internal structure of firms. It then moves on to the analysis of various aspects of strategic interaction between firms and the determinants of industrial structure. Finally, it discusses the role of policy in the context of competition and industrial policies and regulation. The emphasis will be throughout on understanding how the theoretical tools can be used to analyse real world issues. The theory will be confronted against empirical evidence, and its implications for public policy and business strategy will be discussed.

Prerequisite

If taken as part of a BSc degree, courses which must be passed before this course may be attempted:

MN2028 Managerial economics or EC2066 Microeconomics

Topics covered

Theory of the firm

Size and structure of firms:

  • the technological view of the firm
  • the transaction costs-property rights approach
  • investment specificity, incomplete contracts and vertical integration
  • empirical evidence.

Separation of ownership and control: 

  • separation of ownership and control
  • managerial incentives
  • the limits to managerial discretion
  • foundations of the profit-maximisation hypothesis.

Firm conduct and market structure

Short-run price competition: 

  • the Bertrand model
  • Bertrand competition with capacity constraints
  • the Cournot model.

Dynamic price competition: 

  • repeated interaction
  • collusion and cartel stability
  • theories of price wars
  • empirical analysis of market power and collusive behaviour.

Entry deterrence and entry accommodation: 

  • first-mover advantages and the value of irreversible decisions
  • strategies to deter entry
  • strategic substitutability vs. complementarity
  • a taxonomy of business strategies
  • predation.

Product differentiation and non-price competition: 

  • horizontal product differentiation
  • brand proliferation and entry deterrence
  • vertical product differentiation
  • markets with asymmetric information.

Price discrimination: 

  • first-degree, second-degree and third-degree price discrimination
  • non-linear pricing
  • tie-in sales.

Vertical restraints: 

  • efficiency explanations for vertical restraints
  • vertical and horizontal externalities
  • vertical restraints as instruments that restrict competition
  • empirical evidence.

The determinants of market structure: 

  • theory of market structure in exogenous and endogenous sunk cost industries
  • technology and market structure
  • empirical evidence.

Competition policy and regulation

Competition and industrial policy: 

  • competition policy in the EU, the USA and Japan
  • current issues in competition policy
  • industrial policy towards R&D.

Regulation: 

  • regulation of firms with market power under symmetric information
  • regulation under asymmetric information
  • liberalisation and regulation
  • empirical evidence.

Learning outcomes

If you complete the course successfully, you should be able to:

  • Describe and explain the determinants of the size and structure of firms and the implications of the separation of ownership and control
  • Describe and explain the pricing behaviour by firms with market power and its welfare implications
  • Apply analytical models of firm behaviour and strategic interaction to evaluate various business practices, including tacit collusion, entry deterrence, product differentiation, price discrimination and vertical restraints
  • Recognise and explain the basic determinants of market structure and the key issues in competition policy and regulation.

Assessment

Unseen written exam (3 hrs).

Essential reading

  • Tirole, J. The Theory of Industrial Organization. (Cambridge, MA: MIT Press)
  • Church, J.R. and R. Ware Industrial Organization: A Strategic Approach. (Irwin McGraw-Hill)
  • Sutton, J. Sunk Costs and Market Structure. (Cambridge, MA: MIT Press)
  • Armstrong, M., S. Cowan and J.Vickers. Regulatory Reform. (Cambridge, MA: MIT Press)

Course information sheets

Download the course information sheets from the LSE website.