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Exploring Industrial Organization

Exploring Industrial Organization. With Noel Lotz. What is Industrial Organization?. I/O studies: How markets function Industry structure The behavior of firms How firms are organized. How is I/O useful?. Research in the field can be and is used by:

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Exploring Industrial Organization

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  1. Exploring Industrial Organization With Noel Lotz

  2. What is Industrial Organization? • I/O studies: • How markets function • Industry structure • The behavior of firms • How firms are organized

  3. How is I/O useful? • Research in the field can be and is used by: • policy makers to make markets more competitive and to increase social welfare • Firms to improve performance and to better serve customers • And by universities to keep academics off the streets

  4. Early History • 19th century • Cournot and Bertrand duopoly theories • 20th century • 1933 Edward Chamberlin developed a theory of monopolistic competition

  5. Contributions Structure-conduct-performance paradigm Case studies that blended theory with empiricism Descriptive empirical analysis provided stylized facts Criticisms Rested on loose theories Case studies were time consuming and many were required to derive effective generalizations Econometric methods were not capable of explaining causal relationships History and EvolutionThe Harvard tradition(Joe Bain and Edward Mason, 1940s)

  6. Contributions Made essential assumptions precise, through rigorous theoretical analysis, thus suggesting explicit functional forms for econometric testing of SCP hypotheses Showed that market structure should be treated as an endogenous element of a larger system Made significant advances in the application of game theory to oligopoly models Criticisms Theory was more, in many instances, a means of buttressing particular intellectual position than a rigorous systematic investigation History and EvolutionThe Chicago Tradition(Aaron Director and George Stigler, 1970s)

  7. The Music Industry From an I/O perspective

  8. SCP-Paradigm Structure… Conduct… Performance…

  9. Defining the Industry 51 Information 512 Motion Picture and Sound Recording Industries 5122 Sound Recording Industries

  10. The Market Industry Trade Associations are a good source of information

  11. So what is it? • 285 firms • Concentration: largest 4 firms earn 66.9% of total receipts …Oligopoly?

  12. Where does the money go? • This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99. • $0.17 Musicians' unions$0.80 Packaging/manufacturing$0.82 Publishing royalties$0.80 Retail profit$0.90 Distribution$1.60 Artists' royalties$1.70 Label profit$2.40 Marketing/promotion$2.91 Label overhead$3.89 Retail overhead • WARREN COHEN(Rolling Stone Issue 960 p 26)

  13. Does the way music is sold affect product variety? • About 20% of major-label album sales are through Wal-Mart • Major retailers, Wal-Mart, Target, and Best Buy account for approximately 50% of major-label album sales • Approximately 1,200 record stores have closed in the last two years • A Typical Tower Records carries around 60,000 titles whereas Wal-Mart carries around 5000 • Whereas traditional music retailers use advertising dollars to promote new releases Wal-Mart promotes its low price philosophy • WARREN COHEN(Rolling Stone Issue 960 p 26)

  14. Perceived as a threat b/c of illegal downloads Musicians can sell their music directly to the consumer Can lower transaction cost --lower prices Music sharing can generate positive consumption externalities Online music stores such as Real Network, and Apple I-Tunes can lower consumer search costs and generate revenue for music distributors and musicians Increased variety of music—unknowns can discovered The Internet

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