Industrial Organization: Strategy and Competition in Business

Our fifth lecture focuses on games where firms are in different stages of the competition game. In this setting there exists a monopolistic firm already in the market, while another firm considers entering this market in the future. We will examine how the incumbent firm will be affected by the prospect of entrance. We will cover all basic principles of deterrence for the protection of the incumbent’s territory. We will talk about, credibility, empty threats, preemption, contestability and strategic relevance. We will examine the four general business strategies for deterrence and we will see a very intriguing paradox that can teach us a lot about credibility and the importance of reputation.

The topic for this lecture is pricing. In general in economics, we are used in a paradigm in which firms set only one price for each of their products. Sometimes this is indeed the case but, often, we observe that firms charge different prices to different consumers or different occasions or different purchased quantities. In reality, when a firm has some market power and the consumers are each not willing to pay the same for every unit, the firm can price-discriminate to increase its profits. We will analyze the three degrees of price discrimination, tying, bundling and several other methods of advanced pricing. We will also present a brilliant pricing case study with Polaroid.

In our previous lectures we have come to the conclusion that when firms compete with price, the Bertrand paradox leads those firms to lose their entire market power. In today’s lecture we will try to resolve this paradox assuming that the firms can differentiate their products. Differentiation has two dimensions. The horizontal, where beliefs for the quality of the product are subjective; and the vertical, where beliefs for quality are objective. We will present two models for horizontal differentiation: the linear and the circular city. We will also cover the Nobel award winning model of differentiation in quality. We will talk about brand proliferation and will examine how it can be effective as a deterrence mechanism. Additionally, we will have two entertaining case studies on the costs of withdrawal and rebranding.

So far, we have mostly examined the markets in the context of the “firm – customers” relationship. In this lecture our analysis extends to more complicated relationships such that of “manufacturer – retailer – customers”. We will also generalize our setting to include all kinds of vertical relations between firms. When firms are vertically related, we observe an interesting phenomenon that creates tension between the two partners. This phenomenon is referred to as “double marginalization” and creates a vertical externality at the upstream market. Additionally, the opportunity of a retailer to provide demand stimulating pre-sale services may create a horizontal externality, causing the provision of service to end up sub-optimal. We will talk about resale price maintenance, exclusive dealing, exclusive territories and the importance of modern distribution systems. We will also present two interesting case studies: the Levi’s Strauss case and the “free corporate refrigerators” case.

Our ninth lecture explores a modern and quite useful topic. We will examine the economics of networks and platforms. In contrast with usual markets, networks have a key feature: the value of a network good to a consumer depends on the total number of consumers of this good. Platforms often exhibit network effects. That is, when a platform signs up one additional user, the increase in revenues exceeds the value of the subscription of the new user because the platform becomes more attractive for all other current or potential users. We will talk about cutting edge economic notions: stability of equilibrium, critical mass, path dependence and platform instruments. We will also present two fascinating case studies: the OS platforms and the video game platforms.

In our last lecture we will get acquainted with the concept of intellectual property and its institutional protection. Intellectual property becomes more and more relevant as our lives become more and more digital. IP is not a straightforward concept. Its definition can be complicated and tricky and its application may vary from one jurisdiction to another. In our lecture we will examine some basic principles that are internationally standard. We will understand the basics of copyright, patents, trade secrets and trademarks. We will talk about the international protection of IP and, of course, we will have several examples for all complicated notions. Also, this is our last lecture and our end segment is reserved for the “final note”.