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`To Janie and Jackie
`
`Editor in Chief: Denise Clinton
`Acquisitions Editor: Adrienne D’Ambrosio
`Director of Development: Sylvia Mallory
`Managing Editor: Jim Rigney
`Senior Production Supervisor: Nancy Fenton
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`Cover Image: (c)somchai rakin/Shutterstock
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`and Associated Companies throughout the world
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`© Pearson Education Limited 2015
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`The rights of Dennis W. Carlton and Jeffrey M. Perloff to be identified as the authors of this work have been
`asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
`
`Authorized adaptation from the United States edition, entitled Modern Industrial Organization, 4th edition,
`ISBN 978-0-321-18023-0, by Dennis W. Carlton and Jeffrey M. Perloff, published by Pearson Education © 2016.
`
`All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
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`not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such
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`ISBN-10:1-292-08785-4
`ISBN-13: 978-1-292-08785-6
`
`British Library Cataloguing-in-Publication Data
`A catalogue record for this book is available from the British Library
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`Brief Contents
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`PART 1
`
`Introduction and Theory
`CHAPTER 1 Overview
`CHAPTER 2 The Firm and Costs
`
`PART 2 Market Structures
`CHAPTER 3 Competition
`CHAPTER 4 Monopolies, Monopsonies, and
`Dominant Firms
`CHAPTER 5 Cartels
`CHAPTER 6 Oligopoly
`CHAPTER 7 Product Differentiation and
`Monopolistic Competition
`Industry Structure and Performance
`
`CHAPTER 8
`
`PART 3 Business Practices:
`Strategies and Conduct
`CHAPTER 9 Price Discrimination
`CHAPTER 10 Advanced Topics in Pricing
`CHAPTER 11 Strategic Behavior
`CHAPTER 12 Vertical Integration and Vertical
`Restrictions
`
`PART 4
`
`Information, Advertising,
`and Disclosure
`Information
`CHAPTER 13
`CHAPTER 14 Advertising and Disclosure
`
`PART 5 Dynamic Models and
`Market Clearing
`CHAPTER 15 Decision Making Over Time:
`Durability
`CHAPTER 16 Patents and Technological Change
`CHAPTER 17 How Markets Clear: Theory and Facts
`
`PART 6 Government Policies and
`Their Effects
`International Trade
`CHAPTER 18
`CHAPTER 19 Antitrust Laws and Policy
`CHAPTER 20 Regulation and Deregulation
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`Contents
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`PART 1
`
`Introduction and Theory 25
`
`CHAPTER 1 Overview
`
`Models
`Price Theory
`Transaction Costs
`Game Theory
`Contestable Markets
`
`Organization
`Basic Theory
`Market Structures
`Business Practices: Strategies and Conduct
`Information, Advertising, and Disclosure
`Dynamic Models and Market Clearing
`Government Policies and Their Effects
`
`CHAPTER 2 The Firm and Costs
`
`The Firm
`The Objective of a Firm
`Ownership and Control
`
`Mergers and Acquisitions
`Reasons for Mergers and Acquisitions
`Merger Activity in the United States
`Merger Activities in Other Countries
`Empirical Evidence on the Efficiency and
`Profitability of Mergers
`
`Cost Concepts
`Types of Costs
`Cost Concepts
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`50
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`57
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`Economies of Scale
`Reasons for Economies of Scale
`Total Costs Determine Scale Economies
`A Measure of Scale Economies
`
`Empirical Studies of Cost Curves
`Economies of Scale in Total Manufacturing
`Costs
`Survivorship Studies
`
`Cost Concepts for Multiproduct Firms
`Adaptation of Traditional Cost Concepts for
`a Multiproduct Firm
`Economies of Scope
`Economies of Scale and Economies of Scope
`Specialization in Manufacturing
`An Example of an Industry with Economies
`of Scope
`
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 2A Cost Concepts for a Multiproduct
`Firm
`EXAMPLE 2.1 Value of Limited Liability
`
`EXAMPLE 2.2 Conflicts of Interest Between
`Managers and Shareholders
`
`EXAMPLE 2.3 Specialization of Labor
`
`EXAMPLE 2.4 Indiana Libraries
`
`EXAMPLE 2.5 The Baking Industry
`
`EXAMPLE 2.6 Electricity Minimum Efficient Scale
`and Scope
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`Contents
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`PART 2 Market Structures
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`79
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`CHAPTER 3 Competition
`
`Perfect Competition
`Assumptions
`The Behavior of a Single Firm
`The Competitive Market
`
`Elasticities and the Residual
`Demand Curve
`Elasticities of Demand and Supply
`The Residual Demand Curve of Price
`Takers
`
`Efficiency and Welfare
`Efficiency
`Welfare
`
`Entry and Exit
`Restrictions on Entry
`Competition with Few Firms—Contestability
`Definition of Barriers to Entry
`Identifying Barriers to Entry
`The Size of Entry Barriers by Industry
`
`Externalities
`Limitations of Perfect Competition
`The Many Meanings of Competition
`Summary
`Problems
`
`EXAMPLE 3.1 Are Farmers Price Takers?
`
`EXAMPLE 3.2 Restrictions on Entry Across
`Countries
`
`EXAMPLE 3.3 FTC Opposes Internet Bans
`That Harm Competition
`
`EXAMPLE 3.4 Increasing Congestion
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`CHAPTER 4 Monopolies, Monopsonies,
`and Dominant Firms
`
`Monopoly Behavior
`Profit Maximization
`Market and Monopoly Power
`The Incentive for Efficient Operation
`Monopoly Behavior over Time
`
`The Costs and Benefits of Monopoly
`The Deadweight Loss of Monopoly
`Rent-Seeking Behavior
`Monopoly Profits and Deadweight Loss
`Vary with the Elasticity of Demand
`The Benefits of Monopoly
`
`Creating and Maintaining a Monopoly
`Knowledge Advantage
`Government-Created Monopolies
`Natural Monopoly
`
`Profits and Monopoly
`Is Any Firm That Earns a Positive Profit
`a Monopoly?
`Does a Monopoly Always Earn a Positive
`Profit?
`Are Monopoly Mergers to Eliminate Short-
`Run Losses Desirable?
`
`Monopsony
`Dominant Firm with a Competitive Fringe
`Why Some Firms Are Dominant
`The No-Entry Model
`The Dominant Firm–Competitive Fringe
`Equilibrium
`A Model with Free, Instantaneous Entry
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`Summary
`Problems
`Suggested Readings
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`EXAMPLE 4.1 Monopoly Newspaper Ad Prices
`
`EXAMPLE 4.2 Monopolizing by Merging
`
`EXAMPLE 4.3 Controlling a Key Ingredient
`
`EXAMPLE 4.4 Preventing Imitation—Cat Got Your
`Tongue?
`
`EXAMPLE 4.5 Protecting a Monopoly
`
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`EXAMPLE 4.6 EU Allows Merger to Eliminate Losses 130
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`EXAMPLE 4.7 Priest Monopsony
`
`EXAMPLE 4.8 Price Umbrella
`
`EXAMPLE 4.9 China Tobacco Monopoly to
`Become a Dominant Firm
`
`CHAPTER 5 Cartels
`
`Why Cartels Form
`Creating and Enforcing the Cartel
`Factors That Facilitate the Formation of
`Cartels
`Enforcing a Cartel Agreement
`Cartels and Price Wars
`
`Consumers Gain as Cartels Fail
`Price-Fixing Laws
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 5A The Effects of Cartel Size
`
`EXAMPLE 5.1 An Electrifying Conspiracy
`
`EXAMPLE 5.2 The Viability of Commodity
`Cartels
`
`EXAMPLE 5.3 Concrete Example of Government
`Aided Collusion
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`Contents
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`9
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`EXAMPLE 5.4 Relieving the Headache of Running
`a Cartel
`
`EXAMPLE 5.5 Vitamins Cartel
`
`EXAMPLE 5.6 How Consumers Were Railroaded
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`EXAMPLE 5.7 The Social Costs of Cartelization
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`EXAMPLE 5.8 Prosecuting Global Cartels
`
`CHAPTER 6 Oligopoly
`
`Game Theory
`Single-Period Oligopoly Models
`Nash Equilibrium
`The Cournot Model
`The Bertrand Model
`The Stackelberg Leader-Follower Model
`A Comparison of the Major Oligopoly
`Models
`
`Multiperiod Games
`Single-Period Prisoners’ Dilemma Game
`Infinitely Repeated Prisoners’ Dilemma Game
`Types of Equilibria in Multiperiod Games
`
`Experimental Evidence on Oligopoly Models
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 6A A Mathematical Derivation of
`Cournot and Stackelberg Equilibria
`
`APPENDIX 6B Mixed Strategies
`
`EXAMPLE 6.1 Do Birds of a Feather Cournot-
`Flock Together?
`
`EXAMPLE 6.2 Oligopoly Welfare Losses
`
`EXAMPLE 6.3 Mergers in a Cournot Economy
`
`EXAMPLE 6.4 Roller Coaster Gasoline Pricing
`
`EXAMPLE 6.5 Copying Pricing
`
`EXAMPLE 6.6 Car Wars
`
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`Contents
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`CHAPTER 7 Product Differentiation and
`Monopolistic Competition
`
`Differentiated Products
`The Effect of Differentiation on a Firm’s
`Demand Curve
`Preferences for Characteristics of Products
`
`The Representative Consumer Model
`A Representative Consumer Model with
`Undifferentiated Products
`A Representative Consumer Model with
`Differentiated Products
`Conclusions About Representative Consumer
`Models
`
`Location Models
`Hotelling’s Location Model
`Salop’s Circle Model
`
`Hybrid Models
`Estimation of Differentiated Goods Models
`Summary
`Problems
`Suggested Readings
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`APPENDIX 7A Welfare in a Monopolistic Competition
`Model with Homogeneous Products
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`259
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`APPENDIX 7B Welfare in a Monopolistic Competition
`Model with Differentiated Products
`
`EXAMPLE 7.1 All Water Is Not the Same
`
`EXAMPLE 7.2 Entry Lowers Prices
`
`EXAMPLE 7.3 The Jeans Market
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`240
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`EXAMPLE 7.4 A Serial Problem
`
`EXAMPLE 7.5 Combining Beers
`
`EXAMPLE 7.6 Value of Minivans
`
`Industry Structure and
`CHAPTER 8
`Performance
`
`Theories of Price Markups and Profits
`Structure-Conduct-Performance
`Measures of Market Performance
`Rates of Return
`Price-Cost Margins
`Measures of Market Structure
`The Relationship of Structure to Performance
`
`Modern Structure-Conduct-Performance
`Analysis
`Theory
`Empirical Research
`Modern Approaches to Measuring Performance
`Static Studies
`
`Summary
`Problems
`
`APPENDIX 8A Relationship Between the
`Herfindahl-Hirschman Index (HHI) and the
`Price-Cost Margin
`
`APPENDIX 8B Identifying Market Power
`
`EXAMPLE 8.1 Supermarkets and Concentration
`
`EXAMPLE 8.2 How Sweet It Is
`
`PART 3 Business Practices: Strategies and Conduct
`
`313
`
`CHAPTER 9 Price Discrimination
`
`Nonuniform Pricing
`Incentive and Conditions for Price
`Discrimination
`Profit Motive for Price Discrimination
`
`314
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`315
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`317
`317
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`Conditions for Price Discrimination
`Resales
`
`Types of Price Discrimination
`Perfect Price Discrimination
`Each Consumer Buys More Than One Unit
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`Different Prices to Different Groups
`Other Methods of Third-Degree Price
`Discrimination
`
`Welfare Effects of Price Discrimination
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 9A An Example of Price Discrimination:
`Agricultural Marketing Orders
`
`EXAMPLE 9.1 Coupons
`
`EXAMPLE 9.2 Thank You, Doctor
`
`EXAMPLE 9.3 Halting Drug Resales from Canada
`
`EXAMPLE 9.4 Vertical Integration as a Means of
`Price Discrimination: Alcoa Shows Its True
`Metal
`
`EXAMPLE 9.5 A Discriminating Labor Union
`
`EXAMPLE 9.6 Does Competition Always Lower
`Price?
`
`CHAPTER 10 Advanced Topics in Pricing
`
`Nonlinear Pricing
`A Single Two-Part Tariff
`Two Two-Part Tariffs
`
`Tie-in Sales
`General Justifications for Tie-in Sales
`Tie-in Sales as a Method of Price
`Discrimination
`Package Tie-in Sales of Independent Products
`Interrelated Demands
`
`Quality Choice
`Other Methods of Nonlinear Pricing
`Minimum Quantities and Quantity
`Discounts
`Selection of Price Schedules
`Premium for Priority
`Auctions
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`Contents
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`11
`
`Summary
`Problems
`
`APPENDIX 10A The Optimal Two-Part Tariff
`
`APPENDIX 10B Nonlinear Pricing with an Example
`
`EXAMPLE 10.1 Football Tariffs
`
`EXAMPLE 10.2 You Auto Save from Tie-in Sales
`
`EXAMPLE 10.3 Stuck Holding the Bag
`
`EXAMPLE 10.4 Tied to TV
`
`EXAMPLE 10.5 Not Too Suite—Mixed Bundling
`
`EXAMPLE 10.6 Price Discriminating on eBay
`
`CHAPTER 11 Strategic Behavior
`
`Strategic Behavior Defined
`Noncooperative Strategic Behavior
`Predatory Pricing
`Limit Pricing
`Investments to Lower Production Costs
`Raising Rivals’ Costs
`Welfare Implications and the Role of the
`Courts
`
`Cooperative Strategic Behavior
`Practices That Facilitate Collusion
`Cooperative Strategic Behavior and the Role
`of the Courts
`
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 11A: The Strategic Use of Tie-in Sales
`and Product Compatibility to Create or Maintain
`Market Power with Applications to Networks
`
`EXAMPLE 11.1 Supreme Court Says Alleged
`Predation Must Be Credible
`
`EXAMPLE 11.2 Evidence of Predatory Pricing in
`Tobacco
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`Contents
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`EXAMPLE 11.3 The Shrinking Share of Dominant
`Firms
`
`EXAMPLE 11.4 And Only a Smile Remained
`
`EXAMPLE 11.5 Strategic Behavior and Rapid
`Technological Change: The Microsoft Case
`
`EXAMPLE 11.6 Value of Preventing Entry
`
`EXAMPLE 11.7 The FTC versus Ethyl et al.
`
`EXAMPLE 11.8 Information Exchanges: The
`Hardwood Case
`
`CHAPTER 12 Vertical Integration and
`Vertical Restrictions
`
`The Reasons for and Against
`Vertical Integration
`Integration to Lower Transaction Costs
`Integration to Assure Supply
`Integration to Eliminate Externalities
`Integration to Avoid Government Intervention
`Integration to Increase Monopoly Profits
`Integration to Eliminate Market Power
`
`The Life Cycle of a Firm
`Vertical Restrictions
`
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`Vertical Restrictions Used to Solve Problems
`in Distribution
`The Effects of Vertical Restrictions
`Banning Vertical Restrictions
`
`Franchising
`Empirical Evidence
`Evidence on Vertical Integration
`Evidence on Vertical Restrictions
`
`Summary
`Problems
`Suggested Readings
`
`EXAMPLE 12.1 Outsourcing
`
`EXAMPLE 12.2 Preventing Holdups
`
`EXAMPLE 12.3 Own Your Own Steel Mill
`
`EXAMPLE 12.4 Double Markup
`
`EXAMPLE 12.5 Blockbuster’s Solution to the
`Double Marginalization Problem
`
`EXAMPLE 12.6 Free Riding on the Web
`
`EXAMPLE 12.7 Brewing Trouble: Restricting
`Vertical Integration in Alcoholic Beverage
`Industries
`
`PART 4
`
`Information, Advertising, and Disclosure 463
`
`CHAPTER 13
`
`Information
`
`Why Information Is Limited
`Limited Information About Quality
`The Market for “Lemons”
`Solving the Problem: Equal Information
`Evidence on Lemons Markets
`
`Limited Information About Price
`The Tourist-Trap Model
`The Tourists-and-Natives Model
`
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`Providing Consumer Information
`Lowers Price
`How Information Lowers Prices
`An Example: Grocery Store Information
`Programs
`
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 13A Market Shares in the Tourists-and-
`Natives Model
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`13
`
`EXAMPLE 13.1 Genetically Modified Organisms:
`Do Consumers Not Care or Not Read?
`
`EXAMPLE 13.2 Understanding Consumer
`Information
`
`EXAMPLE 13.3 Counterfeit Halal Meat
`
`EXAMPLE 13.4 Certifying Thoroughbreds
`
`EXAMPLE 13.5 Price Dispersion and Search
`Costs in the Talmud
`
`EXAMPLE 13.6 Price Dispersion
`
`EXAMPLE 13.7 Tourist Cameras
`
`CHAPTER 14 Advertising and Disclosure
`
`Information and Advertising
`Promotions
`“Search” Versus “Experience” Goods
`Informational Versus Persuasive Advertising
`Profit-Maximizing Advertising
`
`Effects of Advertising on Welfare
`Price Advertising Increases Welfare
`
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`475
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`477
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`501
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`504
`505
`
`Advertising to Solve the Lemons Problem
`When Advertising Is Excessive
`
`False Advertising
`Limits to Lying
`Antifraud Laws
`Disclosure Laws
`
`Summary
`Problems
`Suggested Readings
`
`APPENDIX 14A Profit-Maximizing Advertising
`
`EXAMPLE 14.1 Branding and Labeling
`
`EXAMPLE 14.2 Celebrity Endorsements
`
`EXAMPLE 14.3 Milk Advertising
`
`EXAMPLE 14.4 Social Gain from Price Advertising
`
`EXAMPLE 14.5 Welfare Effects of Restricting
`Alcohol Ads
`
`EXAMPLE 14.6 Restaurants Make the Grade
`
`PART 5 Dynamic Models and Market Clearing 521
`
`CHAPTER 15 Decision Making Over Time:
`Durability
`
`How Long Should a Durable Good Last?
`Competitive Firm’s Choice of Durability
`The Monopoly’s Choice of Durability
`Costly Installation and Maintenance
`
`Renting Versus Selling by a Monopoly
`Resale Market
`Consumers’ Expectations Constrain the
`Monopoly
`
`Summary
`Problems
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`522
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`545
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`Suggested Readings
`
`APPENDIX 15A Multiperiod Durable Goods
`Monopoly
`
`EXAMPLE 15.1 United Shoe
`
`EXAMPLE 15.2 The Importance of Used Goods
`
`EXAMPLE 15.3 The Alcoa Case: Secondhand
`Economics
`
`EXAMPLE 15.4 Leasing Under Adverse Selection
`
`EXAMPLE 15.5 Sales Versus Rentals
`
`EXAMPLE 15.6 Lowering the Resale Value of
`Used Textbooks
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`Contents
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`CHAPTER 16 Patents and Technological
`Change
`
`Patents, Copyrights, and Trademarks
`Patents
`Copyrights
`Trademarks
`Distinctions Between Patents, Copyrights,
`and Trademarks
`
`Incentives for Inventions Are Needed
`Imitation Discourages Research
`Patents Encourage Research
`Patents Encourage Disclosure
`Patents, Prizes, Research Contracts, and
`Joint Ventures
`Determining the Optimal Number of Firms
`No Government Incentives
`Government-Financed Research
`Prizes
`Relaxing Antitrust Laws: Joint Ventures
`Patents
`Government Uncertainty
`Patent Holders May Manufacture or License
`Eliminating Patents
`
`Market Structure
`Market Structure Without a Patent Race
`Optimal Timing of Innovations
`Monopolies in Patent Races
`
`Summary
`Problems
`Suggested Readings
`
`EXAMPLE 16.1 Piracy
`
`EXAMPLE 16.2 Patents Versus Trade Secrets
`
`EXAMPLE 16.3 Monkey See, Monkey Do
`
`EXAMPLE 16.4 Joint Public-Private R&D
`
`EXAMPLE 16.5 Prizes
`
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`EXAMPLE 16.6 Mickey Mouse Legislation
`
`EXAMPLE 16.7 European Patents
`
`EXAMPLE 16.8 Patent Thicket
`
`CHAPTER 17 How Markets Clear: Theory
`and Facts
`
`How Markets Clear: Three Simple Theories
`Competition
`Oligopoly Models
`Monopoly
`
`Empirical Evidence on the Role of Price
`in Allocating Goods
`The Rigidity of Prices
`Movements in Prices and Price-Cost Margins
`over the Business Cycle
`
`Explaining the Evidence
`Extensions to the Simple Theory: The
`Introduction of Time
`Fixed Costs of Changing Price
`Implications of an Unchanging Price for
`Inventories
`Asymmetric Information and Moral Hazard
`Toward a General Theory of Allocation
`
`Market Structure Is More Than
`Concentration
`Produce-to-Order Versus Produce-to-Stock
`Transmission of Shocks in Industries with
`Fixed Prices
`
`Summary
`Problems
`
`EXAMPLE 17.1 Price Rigidity—It’s the Real Thing
`
`EXAMPLE 17.2 How Much Is That Turkey in the
`Window?
`
`EXAMPLE 17.3 The Cost of Changing Prices
`
`EXAMPLE 17.4 Creating Futures Markets
`
`EXAMPLE 17.5 Oh Say Does That Star-Spangled
`Banner Yet Fly?
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`15
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`PART 6 Government Policies and Their Effects
`
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`CHAPTER 18
`
`International Trade
`
`Reasons for Trade Between Countries
`Comparative Advantage
`Intra-Industry Trade in Differentiated Products
`Free Riding, International Price Differences,
`and Gray Markets
`Dumping
`
`Tariffs, Subsidies, and Quotas
`Competition
`Creating and Battling Monopolies
`Strategic Trade Policy
`Industries with Positive Externalities
`Empirical Evidence on Intervention in
`International Trade
`
`Summary
`Problems
`
`APPENDIX 18A Derivation of the Optimal Subsidy
`
`EXAMPLE 18.1 Gray Markets
`
`EXAMPLE 18.2 Timber Wars and Retaliation
`
`EXAMPLE 18.3 Foreign Doctors
`
`EXAMPLE 18.4 Being Taken for a Ride: Japanese Cars
`
`EXAMPLE 18.5 Wide-Body Aircraft
`
`EXAMPLE 18.6 Steeling from U.S. Consumers
`
`CHAPTER 19 Antitrust Laws and Policy
`
`The Antitrust Laws and Their Purposes
`Antitrust Statutes
`Enforcement
`Goals of the Antitrust Laws
`Who May Sue?
`Economic Theory of Damages
`
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`The Use of U.S. Antitrust Laws
`Private Litigation
`
`Market Power and the Definition of
`Markets
`Market Power
`Market Definition
`
`Cooperation Among Competitors
`Price-Fixing and Output Agreements
`Not All Agreements Among Competitors
`Are Illegal
`Information Exchanges Among Competitors
`Oligopoly Behavior
`Mergers
`
`Exclusionary Actions and Other Strategic
`Behavior
`Competition Between Rivals
`Competitive Behavior Deemed Undesirable
`by the Court
`Vertical Arrangements Between Firms
`
`Price Discrimination
`Price Discrimination Under Robinson-
`Patman
`Tie-in Sales
`
`Effects of Antitrust Laws on the Organization
`of Unregulated and Regulated Firms
`Summary
`Problems
`Suggested Readings
`
`EXAMPLE 19.1 Using the Government to Create
`Market Power: Misuse of the Orange Book
`
`EXAMPLE 19.2 Conflict Between European and
`U.S. Antitrust Authorities: GE-Honeywell
`
`EXAMPLE 19.3 The Merger Guidelines
`
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`Contents
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`EXAMPLE 19.4 Antitrust Laws in Other Countries
`
`674
`
`EXAMPLE 19.5 Colleges and Antitrust: Does Your
`School Belong to a Cartel?
`
`EXAMPLE 19.6 The FTC Plays with Toys
`‘
`’ Us
`R
`
`CHAPTER 20 Regulation and Deregulation
`
`The Objectives of Regulators
`Market Inefficiencies
`Correcting Market Inefficiencies
`Capture Theory and Interest-Group Theory
`
`Making Monopolies More Competitive
`Government Ownership
`Privatizing
`Franchise Bidding
`Price Controls
`Rate-of-Return Regulation
`Quality Effects
`
`Making Competitive Industries More
`Monopolistic
`Limiting Entry
`Agricultural Regulations: Price Supports and
`Quantity Controls
`
`Deregulation
`Airlines
`Ground Transportation
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`Summary
`Problems
`Suggested Readings
`
`EXAMPLE 20.1 Pizza Protection
`
`EXAMPLE 20.2 Cross-Subsidization
`
`EXAMPLE 20.3 Legal Monopolies
`
`EXAMPLE 20.4 Public, Monopolistic, and
`Competitive Refuse Collection
`
`EXAMPLE 20.5 Rent Control
`
`EXAMPLE 20.6 Brewing Trouble
`
`EXAMPLE 20.7 Deregulating Electricity: California
`in Shock
`
`EXAMPLE 20.8 International and U.S. Deregulation
`in Telecommunications
`
`EXAMPLE 20.9 European Deregulation of Airlines
`
`Bibliography
`Glossary
`Answers to Odd-Numbered Problems
`Legal Case Index
`Author Index
`Subject Index
`
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`18
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`Preface
`
`based on game theory. Chapter 7 focuses on monopolistic competition and product
`differentiation. Chapter 8 concludes the first part of the book with a thorough review
`and assessment of empirical work on market structure.
`The remainder of the book covers the “new industrial organization”—material that
`is often missing from traditional texts. These topics, essential for applying the theories
`of industrial organization to everyday problems, are at the heart of many public policy
`debates and are the focus of considerable recent research. Chapters 9 and 10 cover
`common pricing strategies such as price discrimination through quantity discounts
`and tie-in sales. Chapter 11 examines strategic behavior where firms determine the
`best ways to do battle with their rivals. Chapter 12 discusses common business prac-
`tices between manufacturers and distributors (vertical integration and vertical restric-
`tions) and the dramatic changes in public policy toward these practices in recent years.
`The next two chapters, Chapters 13 and 14, address the problems that arise when con-
`sumers are not perfectly informed and when firms must advertise their products. The
`role of time is introduced in Chapters 15 and 16, which analyze how the durability of
`a product affects the market and how innovation can be encouraged. Chapter 17 con-
`siders evidence on the ways markets operate, and explores how modern microeco-
`nomic models of industrial organization may affect the macroeconomic economy.
`Chapter 18 examines the industrial organization issues that arise in international
`trade. The two concluding chapters, Chapters 19 and 20, analyze antitrust policy and
`government regulation.1
`Although we believe that Modern Industrial Organization contains innovative ideas,
`we recognize that any textbook must borrow from existing research. We have tried to
`indicate when we have relied on the insights of others. However, we may have occa-
`sionally omitted a reference to an author whose ideas predated ours. We apologize for
`any such oversights.
`
`Changes in the Fourth Edition
`There are three major changes in the Fourth Edition. First, we have added many new
`applications, as well as discussions of important recent policies and new theories.
`Much of this new material is based on significant findings from more than 250 rele-
`vant articles and books published since our last edition. We have substantially updated
`material on cartels, particularly international cartels, and antitrust activities (Chapter
`5); we have included a new section on estimation issues concerning differentiated
`
`1Sometimes commonly used words have special meanings in the law that differ from the standard us-
`age by economists and the general public. We try to use clear language to express economic rather
`than legal principles. For example, we might say that the “price of wheat in the market in Chicago af-
`fects the price of wheat in the market in Kansas City.” Although such a statement uses the word
`marketloosely, the point of the statement—that the prices of wheat in Chicago and Kansas City are
`related—is clear. In an antitrust trial, however, a specific legal definition of a market (see Chapter 19)
`is used and whether there are two separate markets or a single combined market is often of central
`interest. Our statement should not be interpreted to mean that there are necessarily two distinct
`wheat markets in Chicago and Kansas City for legal purposes.
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`Preface
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`19
`
`goods oligopolies (Chapter 7); we have added a major new section on Sutton’s modern
`approach to structure-conduct-performance analysis (Chapter 8); and we have sub-
`stantially updated our discussion of patents and copyrights (Chapter 16) and regula-
`tion (Chapter 20).
`Second, we have updated 18 examples and added 51 new examples. For instance, in
`one updated application, we conducted a new study of how the prices of Coke and
`Tropicana orange juice vary across grocery stores within a city. Our new examples
`spotlight a range of current events, among them the Enron scandal, the importation of
`low-price drugs from Canada, genetically modified organisms, the effect of 9/11 on
`flag sales, Blockbuster’s innovative pricing polices, mergers in Europe, a monopsony in
`hiring priests, the change of China’s tobacco monopoly to dominant firm status, the
`international vitamins cartel, the value of minivans, the certification of thoroughbreds,
`counterfeit Halal meat, Napster and piracy issues, and many others.
`Third, we have significantly augmented our Web site, www.aw-bc.com/carlton_
`perloff, with extensive supporting material. Still-timely material that we removed
`from the Third Edition is available on the Web site. Further, we have written many
`new applications for the site.
`
`Alternative Course Outlines
`To cover the entire book takes two quarters or semesters. The book is designed, how-
`ever, so that shorter courses can be constructed easily by choosing selected chapters, as
`shown in the following proposed reading lists.
`Chapter 2 through 4 review and extend the basic material that is often covered in
`an intermediate microeconomics course: the theory of the firm, costs, the theory of
`competition, the theory of monopoly, and externalities. These chapters can be re-
`viewed quickly for students with extensive preparation in microeconomics. Chapters 2
`through 8 comprise the basic material for any course. Depending on the interests of
`the students and the instructor, a one-quarter or semester course could then sample a
`few of the chapters in the remainder of the book to obtain a flavor of the ways indus-
`trial organization can be used to study real-world problems.
`
`All courses:
`Carefully cover the core material in Chapters 2 and 5–8.
`
`For courses that do not assume a strong background in microeconomic theory:
`Cover Chapters 3 and 4.
`
`Courses that assume a strong background in microeconomic theory:
`Quickly review Chapters 3 and 4.
`
`Courses that require calculus:
`Include the technical appendixes and material on the Web.
`
`Policy-oriented courses:
`Cover international trade, antitrust, and regulation (Chapters 18 through 20). As
`time allows, include strategic behavior (Chapter 11), price discrimination (Chapters 9
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`Preface
`
`and 10), vertical relationships (Chapter 12), limited information, advertising, and
`disclosure (Chapters 13 and 14), government policies toward innovation (Chapter
`16), and macroeconomics (Chapter 17).
`
`Regulation courses:
`Regulations are dealt with throughout the book. Cover, in particular, externalities
`(Chapters 3 and 4), vertical relations (Chapter 12), limited information (Chapter 13),
`advertising and disclosure (Chapter 14), government policies toward innovation
`(Chapter 16), international trade (Chapter 18), and other government regulation
`(Chapter 20).
`
`Business courses:
`Include strategic behavior (Chapter 11), price discrimination (Chapter 9 and, op-
`tionally, nonlinear pricing, Chapter 10), vertical relations (Chapter 12), information
`and advertising (Chapters 13 and 14), and international trade (Chapter 18).
`
`Courses that stress the latest theories:
`Include strategic behavior (Chapter 11), vertical relations (Chapter 12), informa-
`tion and advertising (Chapters 13 and 14), government policies toward innovation
`(Chapter 16), market operation (Chapter 17), and international trade (Chapter 18).
`
`Advanced courses:
`Add chapters on nonlinear pricing (Chapter 10) and durability (Chapter 15).
`
`Acknowledgments
`We are especially grateful to George Stigler, our departed colleague, for his encourage-
`ment and insightful comments. His contributions to industrial organization influ-
`enced this and every other text in the fiel