Industrial Organization

Introduction

Marc Bourreau

Telecom ParisTech

Marc Bourreau (TPT) Introduction 1 / 15

What is industrial organization?

Industrial organization is concerned with:

the working of markets and industries,
the way firms compete with each other in these markets.

It is also the object of microeconomics. But,

Industrial organization focuses on the study of “imperfect competition”, in
contrast with an utopian vision of perfect competition and the counterexample
of monopoly.
Industrial organization also analyzes in detail competition between firms
by emphasizing the impact of non price variables (advertisement strategy,
differentiation, investment in R&D...).

A dual approach, positive (explanation of facts) and normative (construction

of theories, welfare analysis).

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What use is industrial organization?

It provides conceptual analysis tools for the study of markets and firms’ strat-
egy, in order to understand, evaluate, and anticipate.
For industrial companies and strategy consulting firms (ex: BCG, McKin-
sey), it helps analyzing and anticipating firms’ behavior on markets.
It also helps the regulation (ex : ARCEP, CRE) and competition authorities
(ex: Competition authority in France) that take actions in order to avoid
the negative effects of excessive market powers.

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The development of industrial organization

In the end of the 19th century, an antitrust law (competition policy) was
voted in the United States (The Sherman Antitrust Act in 1890)
In order to preserve competition and prevent cartels. Antitrust laws seek also
to combat monopolization attempts (or abuse of dominant position).
What was a cartel was clear, but what constituted an illegal conduct was less:
in 1920, the U.S. Supreme Court ruled that U.S. Steel was not violating the
Sherman Antitrust Act despite the company having 70% of the production
capacity.
First development of industrial organization: Harvard School
The Harvard School (Chamberlin, Bain...) was developed from the 1930s to
the 1960s for the purpose of providing guidance for competition policy.
It seeks to determine whether one can infer an illegal behavior from certain
characteristics such as a firm’s size.
→ The SCP paradigm : Structure - Conduct - Performance. The structure
of a market (number of vendors, differentiation, costs...) determines market
conduct (price, investment...), which then determines market performance
(efficiency, product variety...).

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The development of industrial organization

Second wave in the 1970s: the Chicago School

During the 1970s, the SCP paradigm is called into question: no conclusive
empirical support.
The Chicago school (Posner, Bork, Peltzman, Stigler...) came about in reac-
tion to the SCP approach. For them, the market regulation mechanism is
free competition between companies. Little action is carried out on market
structure...
But the Chicago school lacks of tools to describe the strategic interactions
between firms.
Industrial organization from 1980 to 1990: "post-Chicago" or "new indus-
trial organization"
Analysis of strategic interactions between firms by using non cooperative
game theory. Firms’ behavior, market structure and performance influence
each other.
Progress in two fundamental fields: the dynamic analysis of economic agents’
behavior and the study of information asymmetries.

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The development of industrial organization

Industrial organization from the 2000s:

Application of industrial organization models to specific markets: telecom-
munication, digital market, etc.
Development and adoption of new methodological tools: structural econo-
metric modeling (empirical industrial organization), experimental economics,
behavioral economics, etc.

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How to do Industrial Organization?

Joseph Schumpeter, History of Economic Analysis,

1954.
"What distinguishes the scientific economic analyst
from other people who think, talk and write about
economic topics, is a command of three main tech-
niques: history, statistics and theory - theory being
defined as "box of tools" or a set of models that per-
mit one to deal analytically with broad classes of
cases by focusing on certain properties or aspects
they have in common".

→ In industrial economics, we develop quite general and simple models, so

that they can apply to a large variety of cases.

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An example: ad quotas on French public TV

The context
On January 8, 2008, Nicolas Sarkozy announced the decision to gradually get
rid of advertisement on French public TV channels. Since then, there is a debate
about reintroducing advertisement on these channels.

The press reaction: "The windfall effect for the two private channels of this
possible reform did not escape anyone. They would have taken a significant part of
the advertising revenue brought by France Televisions - about 760 million euros
in 2007" (Le Monde, January 9th 2008).
After Nicolas Sarkozy’s announcement, stock exchange prices of TF1 and
M6 have sky-rocketed to 10% and 4,5% respectively.
In June 25th 2008, the Cope Commission estimated the loss of earnings of
France Television (FTV) at 450 million euros (FTV’s advertisement revenue
in 2007, that is 800 million euros, minus the advertisement revenue of
before 20 p.m. (e 200M) and on RFO and France3 Regions (e 150M)).

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An example: ad quotas on French public TV

In your opinion...
Is it a good analysis of the TV market economics?

What could be the effects of removing advertisement on public TV chan-

nels?
Other TV channels could grab advertisers’ demand? TNT Channels...
Other media carriers/platforms (Printing press, Internet, ...) ?
Effect on the price of advertising space?
Taking into account "capacity constraints" (advertisement space is limited)?
Effect on the public channels’ audience?

→ Industrial organization provides tools to analyze such questions: com-

petition models, strategic reactions, etc.

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An example: ad quotas on French public TV

A "windfall effect"?

112 days after the reform 301 days after the reform
TF1 -15% -2%
M6 -7% +2%
Non specialized Radios +9% +11%
FM Radios +4% +5%
Daily papers +9% +6%

Evolution of different media channels advertisement revenues 112 and 301 days after the reform

Source : Bourreau and Grece (2011)

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Another example: the 4th mobile license

The context
A fourth mobile phone license was allocated to Free in December 2009. Free
Mobile has launched its non binding offer in January 2012.

The entrance of a fourth operator was seen as a good thing to stimulate competition in the mobile telephony
market, which was often considered as "sluggish".

But the 4th entrant has started being active on the market much later than the three other operators
Considerable investments were necessary.. and controversy on wholesale contract with Orange
What is the reaction of the three other operators to the entrance of a new competitor?
Investments in 4G, launch of low-cost branches (fighting brands)...
→ In industrial organization, we consider other dimensions of competition than the price dimension:
investment in production capacity, in R&D, ...
In order to "stimulate competition", the creation of a fourth network was authorized: is this duplication of
equipment desirable?
→ Efficiency criterion: social welfare

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Course structure

Part 1 : From monopoly to oligopoly

Monopoly, regulation of monopoly, price discrimination
Oligopoly
Collusion
Part 2 : Strategic behavior
Differentiation and advertising
Market structure and market power
Strategic behavior, entry and exit
Vertical relations and vertical integration
Competition and technology (R&D, networks and standards, etc.)

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Sessions

Six course sessions:

Today: Monopoly and price discrimination
Oligopoly; Collusion
Product differentiation and advertising
Market structure and market power; Strategic behavior, entry and exit (1)
Strategic behavior, entry and exit (2); Vertical relations and vertical integration
(1)
Vertical relations and vertical integration (2); Competition and technology
(R&D, networks and standards, etc.)

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Evaluation and follow-up

Evaluation
The course will be graded on the basis of a final exam.
Ability to make use of industrial organization concepts to analyze a prob-
lem.
Ability to resolve a simple modelling problem.

Suivi
Syllabus
Slides: available on the web site http://ses-perso.telecom-
paristech.fr/bourreau/ ("Teaching" section).
To send an email:
marc.bourreau@telecom-paristech.fr

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Indicative bibliography

A good introduction: Cabral, 2000, Introduction to Industrial Organization,

MIT Press.
More advanced: Belleflamme and Peitz, 2010, Industrial Organization: Mar-
kets and Strategies, Cambridge Univ. Press.
Main reference: Tirole, 1988, Theory of industrial organization, Economica (2
volumes).
Reference for competition policy: Motta, 2004, Competition Policy: Theory
and Practice, Cambridge Univ. Press.
On the same subject, Reperes "La politique de la concurrence", Emmanuel
Combe, 2008.

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