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Industrial Organization the Rest of Europe 0273688022_COVER 26/5/05 11:03 am Page 1 . Praise from adopters of the first edition of this successful text: Lipczynski A text that gets a consistently good “my students have been happy with this text…an admirable Wilson reaction from students, Industrial book” – David Paton, Nottingham University, UK Organization: Competition, Strategy, “nicely pitched at the intended audience…it covers the course Goddard Policy has a balance of content that is wonderfully” – Michael Wood, London South Bank University, UK spot-on for courses taught in the UK and Policy Competition, Strategy, Organization Industrial the rest of Europe. It is specially written “the written style is definitely student friendly, which I highly for the growing number of students appreciate” – Sophie Reboud, Burgundy School of Business, Dijon, France studying industrial organization at Industrial Organization intermediate to advanced undergraduate levels on degree courses in economics, Competition, Strategy, Policy 2nd Edition business and management. New To This Edition: • New chapters on pricing, auctions and product differentiation Key Features: bring you up to date with the latest thinking. John Lipczynski • Written from a European perspective, with an • Improved coverage of microeconomic foundations and the emphasis on European businesses and industries. theory of the firm provides a broader understanding of these topics. • A wealth of case studies and examples bring the John Wilson subject to life with vivid and entertaining stories of • Expanded coverage of seller concentration incorporates real world applications. Leading UK, European and geographic concentration, specialization, horizontal integration US businesses are covered, including Microsoft, and industry clusters in Europe. John Goddard eBay, BSkyB and English Premier League football. • Fully updated chapter on market structure, firm strategy and • Only a basic prior knowledge of economic theory at performance includes expanded coverage of current empirical an introductory level is assumed. research in industrial organization. 2nd Edition • Extensive coverage of current empirical research • New Mathematical Methods appendix provides derivations throughout the text, and an extensive bibliography, of important results, allowing technically minded students provide a springboard for students intending to to develop their understanding, without compromising the study industrial organization at a higher level. non-technical style of the main text. Dr John Lipczynski is Principal Lecturer in the Department of Business and Service Sector Management at London Metropolitan University, specializing in microeconomics and industrial economics. Professor John Wilson is in the School of Management at the University of St Andrews, specializing in industrial organization and banking. Professor John Goddard is in the School of Business and Regional Development at the University of Wales, Bangor, specializing in financial economics, industrial economics and the economics of professional sports. www.pearson.co.uk/lipczynski www.pearson-books.com An imprint of IO_A01.qxd 26/5/05 14:12 Page i . Industrial Organization Visit the Industrial Organization, second edition Companion Website at www.pearsoned.co.uk/lipczynski to find valuable student learning material including: n Links to relevant sites on the web n Online glossary of key terms .. IO_A01.qxd 26/5/05 14:12 Page ii . We work with leading authors to develop the strongest educational materials in business and marketing, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk .. IO_A01.qxd 26/5/05 14:12 Page iii . Industrial Organization Competition, Strategy, Policy Second edition John Lipczynski, John Wilson and John Goddard .. IO_A01.qxd 26/5/05 14:12 Page iv . Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2001 Second edition published 2005 © Pearson Education Limited 2001, 2005 The rights of John Lipczynski, John Wilson and John Goddard to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. ISBN 0-273-68802-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 1098765432 09 08 07 06 05 Typeset in 10/12.5 TimesNewRomanPS by 35 Printed by Ashford Color Press, Gosport The publisher’s policy is to use paper manufactured from sustainable forests. .. IO_A01.qxd 26/5/05 14:12 Page v . For my family, Nicole, Sonya, Mark and Anna JL For my daughters, Kathryn and Elizabeth JW For my parents, Chris and Les JG .. IO_A01.qxd 26/5/05 14:12 Page vi . .. IO_A01.qxd 26/5/05 14:12 Page vii . Contents Preface xxiii Acknowledgements xxvii Part I: Theoretical Foundations 1 Industrial organization: an introduction 3 1.1 Introduction 3 1.2 Static and dynamic views of competition 4 1.3 The structure–conduct–performance paradigm 6 1.4 Strategic management: a short diversion 16 1.5 Structure of the book 19 Discussion questions 21 Further reading 21 2 Microeconomic foundations 23 2.1 Introduction 24 2.2 Production and costs 24 2.3 Demand, revenue, elasticity and profit maximization 41 2.4 Theory of perfect competition and monopoly 51 2.5 Efficiency and welfare properties of perfect competition and monopoly 56 2.6 Theory of monopolistic competition 62 2.7 Summary 65 Discussion questions 67 .. IO_A01.qxd 26/5/05 14:12 Page viii . viii Contents 3 Theories of the firm 69 3.1 Introduction 70 3.2 The neoclassical theory of the firm: historical development 71 3.3 Critique of the neoclassical theory of the firm 73 3.4 Separation of ownership from control: managerial theories of the firm 76 3.5 The behavioural theory of the firm 88 3.6 The Coasian firm and the transaction costs approach 90 3.7 Other approaches to the theory of the firm 99 3.8 Strategic and knowledge-based theories of the firm 103 3.9 Summary 108 Discussion questions 110 Further reading 111 Part II: Structural Analysis of Industry 4 Oligopoly: non-collusive models 115 4.1 Introduction 116 4.2 Interdependence, conjectural variation, independent action and collusion 117 4.3 Models of output determination in duopoly 120 4.4 Models of price determination in duopoly 133 4.5 The kinked demand curve and models of price leadership 138 4.6 Game theory 144 4.7 Summary 157 Discussion questions 159 Further reading 160 5 Oligopoly: collusive models 161 5.1 Introduction 161 5.2 Collusive action and collusive forms 162 5.3 Collusive institutions 166 5.4 Economic models of price and output determination for a cartel 173 5.5 Other motives for collusion 180 5.6 Factors conducive to cartel formation 183 5.7 Influences on cartel stability 189 5.8 Summary 202 Discussion questions 203 Further reading 204 .. IO_A01.qxd 26/5/05 14:12 Page ix . Contents ix 6 Concentration: measurement and trends 205 6.1 Introduction 205 6.2 Market and industry definition 206 6.3 Official schemes for industry classification 210 6.4 Measures of concentration 211 6.5 Interpretation of concentration measures 228 6.6 Trends in concentration and the location of industry 230 6.7 Summary 241 Discussion questions 242 Further reading 243 7 Determinants of seller concentration 245 7.1 Introduction 245 7.2 Seller concentration: systematic determinants 246 7.3 Horizontal mergers: theoretical motives 258 7.4 Horizontal mergers: some empirical evidence 262 7.5 The random growth hypothesis 264 7.6 Summary 273 Discussion questions 275 Further reading 275 8 Barriers to entry 277 8.1 Introduction 277 8.2 Classification of barriers to entry 279 8.3 Structural barriers to entry 279 8.4 Entry-deterring strategies 286 8.5 Potential entry and contestability 306 8.6 Entry and industry evolution 308 8.7 Empirical evidence on entry 309 8.8 Summary 313 Discussion questions 314 Further reading 315 9 Market structure, firm strategy and performance 317 9.1 Introduction 317 9.2 Empirical tests of the SCP paradigm 318 9.3 Strategic groups 326 9.4 Sources of variation in profitability: industry, corporate and business unit effects 328 9.5 The new empirical industrial organization (NEIO) 332 .. IO_A01.qxd 26/5/05 14:12 Page x . x Contents 9.6 The persistence of profit 341 9.7 Summary 346 Discussion questions 348 Further reading 349 Part III: Analysis of Firm Strategy 10 Pricing 353 10.1 Introduction 353 10.2 Cost plus pricing 354 10.3 Price discrimination 357 10.4 Peak-load pricing 371 10.5 Transfer pricing 374 10.6 Summary 382 Discussion questions 384 Further reading 385 11 Auctions 387 11.1 Introduction 387 11.2 Auction formats, and models of bidders’ valuations 389 11.3 The pure common value model and the winner’s curse 390 11.4 Optimal bidding strategies and revenue equivalence in the independent private values model 394 11.5 Extensions and additional topics in auction theory 401 11.6 Empirical evidence 406 11.7 Summary 412 Discussion questions 414 Further reading 414 12 Product differentiation 415 12.1 Introduction 415 12.2 Types of product differentiation 416 12.3 Monopolistic competition revisited: the socially optimal amount of product differentiation 420 12.4 Lancaster’s product characteristics model 422 12.5 Hotelling’s location model 432 12.6 Salop’s location model 446 12.7 Summary 449 Discussion questions 451 Further reading 452 .
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