THE UNIVERSITY OF TEXAS AT AUSTIN

ECO 328: INDUSTRIAL ORGANIZATION (34270)

Spring, 2019

Eugenio J. Miravete
BRB 3.134A ‐ Ph.: 512‐232‐1718
E‐mail: miravete@eco.utexas.edu
http://www.eugeniomiravete.com

Lectures: Tuesdays and Thursdays, from 11:00am to 12:30pm in GAR 2.112.

Office Hours: Tuesdays and Thursdays from 1:30pm to 2:30pm in BRB 3.134A.

T.A.: Rong Chen. Office Hours: Mondays and Wednesdays, 9:30 to 11:00 in BRB 3.124
(rong.chen@utexas.edu).

Description: Industrial Organization deals with the way markets are configured, how many firm exist, how
they relate to each other, and how this interaction has an effect on production, pricing, investment,
advertising, and other decisions. We are not going to study how firms are internally organized and how
they coordinate human resources, materials, and technological knowledge to produce efficiently. These
problems fall within the area of management. Industrial Organization is more concerned about
interactions among firms and how they affect market outcomes.

We will quickly review the polar cases of market configuration: perfect competition, the one where
producers do not have any market power and monopoly, when a single producer has the maximum
market power possible. And then we will focus on the more realistic configuration: oligopoly. Here a small
number of firms produce either a single or differentiated products and compete with each other for a
common final customer. We will not simply cover different models of firm behavior but provide elements
to compare them in terms of efficiency and thus to serve as the basis for antitrust policies.

The tools that we are going to cover in this course should help you understanding the role of price
discounts, bundling, advertising, entry deterrence, and product differentiation, as well as to show how
they serve the business purposes of firms and how they affect consumer welfare. Thus, we will be able to
understand the logic behind some common business practices as well as the reasons for regulation of
some industries and the economic impact of particular public policies (restrictions on advertising or
mergers for instance).

Requirements: This is an advanced undergraduate course in industrial organization. ECO 420K with a
grade of at least C‐ is required. The course includes a substantial workload and lectures will make use of

Eugenio J. Miravete Department of Economics The University of Texas Austin, TX 78712

analytical methods to cover models rather than just verbal descriptions. Formal rigor is expected from
students. We will study the behavior of firms and the structure of markets. The first goal is to apply
microeconomic theory to understand when and how firms exercise market power and its impact on
market efficiency and consumer welfare. The second goal is to apply the theoretical insights to antitrust
cases. Do not panic though. I am not here to test your mathematical abilities although we will make use
of math to formalize economic arguments. My goal is that you develop an understanding of the economic
reasons behind firms’ strategies and that this rationale becomes second nature to you.

Textbook:

Industrial Organization: Contemporary Theory and Empirical Applications, Lynne Pepall, Dan
Richards, and George Norman, Wiley, 5th Edition, 2014.

Additional Text:

The Antitrust Casebook: Milestones in Economic Regulation, William Breit and Kenneth Elzinga,
Dryden Press, 3rd Edition, 1996.

Teaching Approach: I use slides and/or the blackboard for my presentations. When using slides, I will post
incomplete versions in CANVAS, as well as any additional course materials. The textbook by Pepall, Richards
and Norman covers most of the material in great detail. It is a great textbook and you should read it. It
also includes review problems at the end of each chapter.

There are also case studies that I sometimes use at the end of some topics to illustrate how the models
can and have been applied in antitrust decisions. The case studies are drawn primarily from the casebook
by William Breit and Kenneth Elzinga and I encourage you to read these short chapters ahead of the class
discussions. (This book is out of print but I will make the reading material available to you).

Attendance: I will randomly take attendance. You should not expect any credit if you miss three of these
without justification. Please contact me ahead of class if you are unable to attend. Valid excuses include
demonstrable job interviews and a doctor’s note if you are ill.

Participation: Individual meaningful participation (different from attendance) will be taken into account
towards the final grade.

Group Work: You can work in groups of up to five people for your cases and homework assignments. You
are encouraged to do so. You only need to provide with one set of solutions and all will get the same score.
Do not forget to include all names and UTEIDs in the first page of your answers.

Cases: I will assign two Harvard Business School cases for discussion. I will distribute them in class one
week in advance of their due date. They will be discussed in class as a key motivating material and no
specific knowledge of the topic is required beyond “common sense.” Before the discussion you will hand
in a written solution, which will be graded. As a rule of thumb, answering the motivating questions of the
cases should not take more than 2‐3 pages. Be concise but remain focused and go straight to the point.
No late assignments will be accepted.

Homework: There will be eight problem sets. Not all of them carry the same weight. They will be graded.
Normally I will post the assignments on Thursday and they will be due one week later, at the beginning of
the lecture. No late assignments will be accepted under any circumstances. I will not take any assignment
in the middle or at the end of the lecture.

Exams: There will be three in‐class exams on Thursdays, February 21st; April 4th; and May 9th. Whenever
possible, there will be in‐class review sessions ahead of these exams. All exams will carry the same weight
towards the final grade. Exams are NOT cumulative: material covered in one of them will not be covered
in the others (although as it should be obvious to you, they do not constitute separate bodies of
knowledge). Exams are closed book and consulting books or notes will not be permitted. There will be no
make‐up dates. If you miss one exam due to a documented illness or medical emergency, your final grade
will be computed out of the other exams that you did complete. If you fail to provide with the medical
justification you will not be credited for the missed exam.

Grading: Attendance 7.5%; participation 7.5%; HBS cases 10% (5% each); problem sets 25%; exams 50%
(all of them weighted equally).

Honor Code: The core values of the University of Texas at Austin are learning, discovery, freedom,
leadership, individual opportunity, and responsibility. Each member of the university is expected to uphold
these values through integrity, honesty, trust, fairness, and respect towards peers and community.
Suspicion of improper behavior will be reported to Student Judicial Services.

No Electronics Policy: The use of any portable electronics with wireless connections (phones, laptops,
ipads, and so on) are not allowed in class or during the exams. Not observing this policy during class will
affect your participation grade negatively. If you are found to use portable electronics with wireless
connections during exams, you will be asked to leave the exam room and you will be reported to Student
Judicial Services.

Outline of the Course: The main topics covered in this course are the following (approximately one per
week):

1. Antitrust (Chapter 1)
 Antitrust and Industrial Organization
 Breit‐Elzinga (BE) 1. Antitrust Statutes: Sherman Act, Clayton Act, FTC Act

2. Technology and Costs (Chapters 2, 4).

 HBS: Lille Tissages
 Review of cost concepts, profit maximization, welfare measurement

3. Linear Monopoly Pricing (Chapter 5)

 Third Degree Price Discrimination
 (BE) 3. Applications: U.S.vs Alcoa (1945), U.S. vs United Shoe Machinery, U.S. vs E.I. duPont de
Nemours & Co

4. Nonlinear Monopoly Pricing (Chapter 6)

 First and second degree price discrimination
 Two part tariffs
  (BE) 4. Applications: Utah Pie Co. vs Continental Baking Co. (1967), FTC vs MortonSalt (1948),
Eastman Kodak vs Image Technical Services

5. Bundling and Tie‐in Sales (Chapter 8)

 Pure and mixed bundling
 Bundling and tying
 Microsoft case

6. Cournot Model (Chapter 9)

 HBS: Beauregard
 Capacity competition: the Cournot model
 Price‐markups, measures of market concentration

7. Bertrand Model (Chapter 10)

 Differentiated products
 Location models

8. Stackelberg Model (Chapter 11)

 Sequential price competition
 Credible and empty threats
 Chain Store Paradox

9. Entry Deterrence and Predatory Pricing (Chapters 12, 13)

 Limit pricing
 Predatory pricing
 Raising rival’s costs
 (BE) 9. Application: Northeastern Telephone Co. vs AT&T (1981); Matsushita Electric vs. Zenith
Radio Corp (1986).

10. Collusion (Chapter 14)

 Dynamic games
 Creating and enforcing cartels
 Cooperation and repeated play
 (BE) 10. Applications: U.S. vs Addyston Pipe and Steel Co., Interstate Circuit, Inc. vs U.S. (1939),
E.I. duPont and Ethyl Corporation v FTC (1984).

11. Horizontal Mergers (Chapter 15)

 Merger paradox, cost synergies, and product differentiation
 Merger guidelines for horizontal mergers
 (BE) 11. Application: Standard Oil of New Jersey vs U.S., FTC vs Coca‐Cola Bottling Company.

12. Vertical Mergers and Restraints (Chapters 16, 17, 18)

 Procompetitive mergers
 Foreclosure and conglomerate mergers
 Non‐Price Vertical Restraints (if time allows it)
 (BE) 12. Application: Brown Shoe vs U.S; Ford Motor Co. vs U.S.; U.S. vs Colgate (1919), Continental
TV vs GTE Sylvania.