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Industrial Organization: Markets and Strategies
Industrial Markets and Strategies provides an up-to-date account of modern industrial organization that blends theory with real-world applications. Written in a clear and accessible style, it acquaints the reader with the most important models for understanding strategies chosen by firms with market power and shows how such firms adapt to different market environments. It covers a wide range of topics including recent developments on product bundling, branding strategies, restrictions in vertical supply relationships, intellectual property protection, and two-sided markets, to name just a few. Models are presented in detail and the main results are summarized as lessons. Formal theory is complemented throughout by real-world cases that show students how it applies to actual organizational settings. The book is accompanied by a website containing a number of additional resources for lecturers and students, including exercises, answers to review questions, case material and slides.
720 pages, Paperback
First published April 1, 2008
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Displaying 1 - 3 of 3 reviews
May 16, 2018
>When competing on prices with homogeneous goods (à la Bertrand), firms will choose a price equal to the marginal cost. With any other price, one of the firms would have the incentive to lower its price and undercut the rival in order to steal customers. Cost asymmetries will drive firms out of the market. When instead of deciding the price, firms decide on quantity (à la Cournot), profits are higher than 0, but as the number of firms grows, the equilibrium price converges to the marginal cost again, however competition is not cut-throat but erodes firm profits gradually. Any factor that reduces the profitability of undercutting reduces the intensity of rivalry and creates market power (i.e. the ability to sustain prices above marginal costs): product differentiation, capacity constraints, search costs, switching costs, etc
>Price discrimination (also called segmentation or price customization) yields maximum profits and can be created through: produce-line sorting, by offering an additional feature for a premium (e.g. hardcover v. paperback, first edition v. reprints); controlled price decreases (e.g. geographic pricing, emailed discounts); sorting on buyer characteristics such as age, institution type, user status, ability to pay (typically: kids v. adults, students v. seniors, academic v. corporate, end user v. reseller) (fun fact: colleges effectively proactive price customization under the name of scholarships and financial aid); nonlinear pricing based on transactional characteristics (e.g. early booking, high quantities discount). Factors to be taken into consideration with price customization are elasticity of demand, customers’ perception of ‘fairness’, ability to prevent market seepage.
>Remarks: (1) Total profits for a monopolist will be higher than the total profits obtained when each variety is owned by a different firm, because each firm would choose the price so as to maximise individual profits while the monopolist internalizes the effect that a change in the price of variety one exerts on the sales of variety two and vice versa. (2) When firms compete in price and each firm responds to an expected increase in the rival’s price by increasing the own price, we talk about strategic complementary; when firms compete in quantifies and each firm backs off after an expected increase in the rival’s production, we talk about strategic substitutability. (3)We talk about a direct effect when we consider the effect of a change made by the firm itself on its profits, while we talk about a strategic effect when we talk about a change in profits derived from the adjustment of the rival’s choices after the firm’s decision.
>In the hotelling model the strategic effect always dominates, and firms choose maximum differentiation. However, there might exist reasons why firms do not want to locate at extremes – consumers not being uniformly distributed but concentrated around the centre, consumer close to the centre deciding not to buy if the firm locates too far, price competition is banned or regulated. This also applies to vertical differentiation: firms will be incentivized to choose different quality levels.
>Collusion – a situation where firms set prices higher than the NE of the one-shot game – is made possible by repeated interaction and credible punishment of deviations. It will be enforced as long as the short-term benefit of a deviation is lower than the long-term cost. Therefore, a more sever punishment, a less profitable deviation, and higher collusion profits will make collusion more likely successful. Specifically, structural factors that facilitate it are concentration, entry barriers, regularity and frequency of orders, stable and increasing demand, market transparency, symmetry. However, collusion cannot be inferred form market data but requires hard evidence. Ex-ante policies include banning facilitating practices such as private announcements of future prices/outputs and cross-ownership among competitors, as well as merger control and deterrence of collusion through higher fines and private damages. Ex-post policies include leniency programs and facilitating police search powers.
>More on entry: entry of new firms increases competition & competition drives out the least efficient firms. Market size (-) and entry costs (structural barriers to entry) (+) are crucial determinants of market structure: the intensity of post-entry rivalry determines ex-ante entry incentives. However, markets characterized by variable size investments (as opposed to fixed exogenous sunk costs or strategic barriers) exhibit returns that increase with market size. Credibility is fundamental.
>Price discrimination (also called segmentation or price customization) yields maximum profits and can be created through: produce-line sorting, by offering an additional feature for a premium (e.g. hardcover v. paperback, first edition v. reprints); controlled price decreases (e.g. geographic pricing, emailed discounts); sorting on buyer characteristics such as age, institution type, user status, ability to pay (typically: kids v. adults, students v. seniors, academic v. corporate, end user v. reseller) (fun fact: colleges effectively proactive price customization under the name of scholarships and financial aid); nonlinear pricing based on transactional characteristics (e.g. early booking, high quantities discount). Factors to be taken into consideration with price customization are elasticity of demand, customers’ perception of ‘fairness’, ability to prevent market seepage.
>Remarks: (1) Total profits for a monopolist will be higher than the total profits obtained when each variety is owned by a different firm, because each firm would choose the price so as to maximise individual profits while the monopolist internalizes the effect that a change in the price of variety one exerts on the sales of variety two and vice versa. (2) When firms compete in price and each firm responds to an expected increase in the rival’s price by increasing the own price, we talk about strategic complementary; when firms compete in quantifies and each firm backs off after an expected increase in the rival’s production, we talk about strategic substitutability. (3)We talk about a direct effect when we consider the effect of a change made by the firm itself on its profits, while we talk about a strategic effect when we talk about a change in profits derived from the adjustment of the rival’s choices after the firm’s decision.
>In the hotelling model the strategic effect always dominates, and firms choose maximum differentiation. However, there might exist reasons why firms do not want to locate at extremes – consumers not being uniformly distributed but concentrated around the centre, consumer close to the centre deciding not to buy if the firm locates too far, price competition is banned or regulated. This also applies to vertical differentiation: firms will be incentivized to choose different quality levels.
>Collusion – a situation where firms set prices higher than the NE of the one-shot game – is made possible by repeated interaction and credible punishment of deviations. It will be enforced as long as the short-term benefit of a deviation is lower than the long-term cost. Therefore, a more sever punishment, a less profitable deviation, and higher collusion profits will make collusion more likely successful. Specifically, structural factors that facilitate it are concentration, entry barriers, regularity and frequency of orders, stable and increasing demand, market transparency, symmetry. However, collusion cannot be inferred form market data but requires hard evidence. Ex-ante policies include banning facilitating practices such as private announcements of future prices/outputs and cross-ownership among competitors, as well as merger control and deterrence of collusion through higher fines and private damages. Ex-post policies include leniency programs and facilitating police search powers.
>More on entry: entry of new firms increases competition & competition drives out the least efficient firms. Market size (-) and entry costs (structural barriers to entry) (+) are crucial determinants of market structure: the intensity of post-entry rivalry determines ex-ante entry incentives. However, markets characterized by variable size investments (as opposed to fixed exogenous sunk costs or strategic barriers) exhibit returns that increase with market size. Credibility is fundamental.
April 19, 2020
Difficult but worthwhile as a non-economist. Heavy on the game theory so best to have some mathematical background. I wouldn't read this as a primer.
October 31, 2022
This is a rather difficult book for amateurs. I skipped most of the mathematical parts. Very insightful book but not sure about its practical value for business pratices.
Displaying 1 - 3 of 3 reviews