1 / 22

Industrial Organization I

Industrial Organization I. A Brief History Price Discrimination. A Brief History. The Early Period (1800’s & early 1900’s) Cournot (1838) outlined theories of monopoly, competition and oligopoly Bertrand (1883) and Edgeworth (1897): no single theory, assumptions are crucial

cyndi
Download Presentation

Industrial Organization I

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Industrial Organization I A Brief History Price Discrimination

  2. A Brief History • The Early Period (1800’s & early 1900’s) • Cournot (1838) outlined theories of monopoly, competition and oligopoly • Bertrand (1883) and Edgeworth (1897): no single theory, assumptions are crucial • Marshall popularized supply curve and notion of partial equilibrium analysis. • Stagnant period in the early 1900’s

  3. Brief History • The Rebirth of Theoretical IO (1930-1950): • Chamberlin (1933): monopolistic competition and product differentiation; endogenous N • First Empirical IO Wave (1950-1960), little theory: • Regression analysis on Census (industry) data • STRUCTURE-CONDUCT-PERFORMANCE paradigm (Bain, 1956)

  4. Brief History • First Empirical IO Wave (continued): • Structure: # sellers & buyers, barriers to entry • Conduct: type of price/advertising competition • Performance: profits, social welfare, market share • Concentration=bad for consumers → anti-trust regulation • Weakness: Market Structure (concentration) is endogenous

  5. Brief History • The Chicago Critique (1960-1980): • Firms become big for particular reasons • More careful econometrics • Explains profitability with firm heterogeneity but does not treat oligopoly pricing • Mostly descriptive battle with S-C-P people

  6. Brief History • Theoretical IO Lives again (1980-1990): • Game theory dominates the field • Understanding of strategic behavior with few players. • Starts to become a key component in empirical work • Caveat: some theories predict “too many” outcomes, empirics struggle with finding testable hypotheses

  7. Brief History • Second Empirical IO Wave (1990-): • “New Empirical IO” (NEIO) • (Game) Theory and econometrics • Computationally intense, complex models • One industry at a time • IO economists differ in the methods used • Data sets more widely available (e.g. scanner data)

  8. The Modern Empirical Work • Main Objectives: • Estimate parameters of a model of equilibrium behavior (“structural work”) • Answer a (policy) question, test a model, create a counterfactual situation • Methods vary by industry, question and data available • Understand the industry • Collect data • Choose theory • Carry out empirical work

  9. Example • What is the effect of a merger? • Coordinated effects: is the new industry more able to collude? • Unilateral effects: less competitors means higher prices? • Efficiencies: bigger firm means reduced costs, better products • Other anticompetitive effects: more difficult entry, foreclosure

  10. Example : Nevo (2000) Kellogg: Corn Flakes, Fruit Loops, Krispix General Mills: Cheerios, Lucky Charms Quaker: Life, CapNCrunch Supply (Ω) Pre-Merger equilibrium Prices, Quantities, Advertising, etc. Demand (θ)

  11. Example : Nevo (2000)

  12. Example : Nevo (2000) Kellogg - General Mills: Corn Flakes, Fruit Loops, Krispix, Cheerios, Lucky Charms Quaker: Life, CapNCrunch Supply (Ω) Post-Merger equilibrium (?) Prices, Quantities, Advertising, etc. Demand (θ)

  13. Industrial Organization I Price discrimination

  14. Imperfect Competition and Market Power Price MC Producer surplus (PC) P* Demand QPC Q • Perfect competition: • Welfare is maximized, quantity is the largest and price is the lowest

  15. Imperfect Competition and Market Power Producer surplus Price MC P* Market power MC* Demand Marginal Revenue (MR) QIC QPC Q • With imperfect competition (monopoly, oligopoly): • Profit maximizing rule: MR=MC • At QPC: MC>MR, not optimal • QIC<QPC, price is higher and total welfare is lower

  16. Question • If there is market power: • Can firms do better than this? • Answer: yes, price discriminate

  17. Price Discrimination: Introduction • So far: • 1 price for all consumers • 1 price for all units purchased • Larger profits if: • Different consumers pay different prices (e.g. income, age, location, preferences) • Price per unit varies with quantity consumed

  18. Assumptions • Keys: • No arbitrage possibilities (for most PD cases) • Goods: high taxes or transportation costs, perishable products • Services (Restaurants, transportation, entertainment), e.g. student or senior citizen discounts (idcheck) • Market power (let’s assume monopoly for now)

  19. Assumptions • Price discrimination is legal • Firm has information on demand preferences • Ideally: all consumers’ exact willingness to pay • At least: “type” of consumer (e.g. age or income)

  20. Reasons for Price Discrimination • Firms with market power can do better • Consumers are different: willingness to pay varies (price sensitivity) • (Some) consumers receive a surplus with uniform pricing

  21. Classification

  22. Methods • Linear pricing: • Same price for all units purchased, but price differs by consumer type (“personalized” pricing) • Non-Linear pricing: • Take it or leave it package offer • x units of a good at package price “r” • Two-part tariff: • Fixed fee “A” • Per unit price “p” Can be “personalized” or not

More Related