Module 1

Module 1:
Part a) Industry Economics and Game Theory for the Analysis of Market Power

(8 a.h.¹)

Part b) Market Definition and the Assessment of Market Power in Competition Law

(4 a.h.¹)

Outline of Course Contents

1. Introduction to Markets: prices, profits, and welfare

a. Values for buyers, demand functions, elasticity.

b. Costs: fixed, variable, marginal; sunk, opportunity costs.

c. Consumers’ and producers’ surplus. Welfare.

d. Revenues and Profit. Optimal (monopoly) pricing.

e. Effect of cost variations on optimal prices.

f. Vertical relations: pricing at the wholesale level.

2. Perfect competition and efficiency

a. Market equilibrium

b. Efficiency of competitive markets as a welfare benchmark

c. Types of market failures: externalities and public goods

d. Dynamics

3. Use of statistics and econometrics for market analysis

a. Econometric demand estimation from market data

b. Forecasting future demand and elasticity

c. Use of an estimated demand curve for pricing and entry decisions

4. Introduction to strategic behavior: Game Theory

a. Evaluating the actions and reactions or ‘large’ players

b. Normal and extensive form games

c. Equilibrium

d. Strategic commitment

e. Auctions

5. Oligopoly applications

a. Static, repeated, and dynamic oligopoly games

b. Prices and quantities: Cournot, Betrand and Stackelberg-type models

c. Entry and price discrimination: application to patent expiration in pharmaceutical markets and
parallel trade

d. Herfindal-Hirschman Index and market concentration

e. Industry profitability and the Lerner index

6. Special topics in pricing

a. Nonlinear pricing and price discrimination

b. Introduction to bundling and tying

c. Network effects, switching costs and search costs

d. Uncertainty and Incomplete information

e. Penetration pricing, signaling

f. Investments, capacity expansion and yield management

7. Pricing and state intervention: introduction to competition policy and regulation

a. Collusive effects: collusion, coordinated behavior and cartels

b. Unilateral effects: predatory pricing and abuse of dominance

c. European vs. US Law

d. Natural monopolies, regulatory policy and cost-oriented pricing

8. Market Definition and the Assessment of Market Power in Competition Law

a. The concept of relevant markets

b. Demand substitution

c. The hypothetical monopolist and SSNIP tests – critical loss analysis

d. Measurement and relation to elasticities

e. Supply substitution

f. Special cases: after markets and two-sided markets

g. Assessing market power: market shares and the role of market definition

h. Direct approaches to assessing market power and monopoly

Main references

D. M. Kreps, Microeconomics for Managers, Norton, 2004
M. R. Baye, Managerial Economics & Business Strategy, McGraw Hill, 2009
P. Belleflamme and M. Peitz, Industrial Organization: Markets and Strategies, Cambridge, 2010

Game Theory (not technical)
A. Dixit and B. Nalebuff, Thinking Strategically, Norton, 1991
P. McAfee, Competitive Solutions, Princeton, 2002
A. Dixit and B. Nalebuff, The Art of Strategy, Norton, 2008

Game Theory (a little more technical)
J. Watson, Strategy: An Introduction to Game Theory, Norton, 2002
R. Gibbons, Game Theory for Applied Economists, Princeton, 1992

P. Klemperer, Auctions: Theory and Practice, Princeton, 2004
P. Milgrom, Putting Auction Theory to Work, Cambridge, 2004
V. Krishna, Auctions Theory, Academic Press, 2002
Intro to Competition and Regulation Policy
W.K. Viscusi, J. M. Vernon and J. E. Harrington Jr., Economics of Regulation and Antitrust, MIT Press, 2005
Motta, M., Competition Policy: Theory and Practice, Cambridge, 2004

¹ a.h. = academic hour (50 minutes)