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ECON306: Industrial Organization

Unit 4: Monopoly   A market with a single seller of a product or service has an obvious advantage in pricing, thus posing a persistent threat to desirable competitive outcomes.  In this unit, we will identify the possible sources of market power, including scale economies and network organization, both of which are advantageous to a firm seeking to establish monopoly.  Entry barriers also foster monopoly by keeping potential competitors out, while patents enable firms to enjoy exclusive rights as a reward for the discovery of an idea and can often result in monopoly as well.  After discussing the sources of monopoly, we will study monopolistic pricing strategies. 

Our study of price discrimination in a single product monopoly context will shed light on how monopolists can charge one consumer one price and another consumer another price, even though the cost of producing the good or serving the consumer remains the same.

We will then take a look at instances where a multi-product firm has monopoly in one product; in these situations, the consumer might be forced to buy another product (or products), because the firm has tied it to the monopolized one.  For example, when selling a camera, the buyer has to agree to pay for the film as well.  Another way for a multiproduct firm to offer its monopolized good is by bundling them together.  Microsoft, for example, bundled Internet Explorer with the Windows Operating System, although the internet browser did not appear to generate revenues directly, because it was bundled at no extra cost.  However, Microsoft did achieve its goal of establishing a strong position for itself in the browser market.  It was later penalized for this action on the grounds of violating antitrust laws.

Unit 4 Time Advisory
Time Advisory: This unit will take you 9 hours to complete.
·        Subunit 4.1: 3 hours
·        Subunit 4.2: 6 hours
·        WebMedia: This is a 5 minute lecture. 

Unit4 Learning Outcomes
Learning Outcomes:
Upon successful completion of this unit, students will be able to:
·        Describe and explain what is meant by market power and what are the determinants of a firm's market power.
·        Analyze why firms in the same industr yhave different degrees of market power.
·        Analyze how entry barriers contribute to market power.
·        Explain the government's role and its rationale in creating entry barriers.
·        Identify and analyze the structural characteristics that pose to be entry barriers, including economies of scale, cost advantages, sunk expenditures of the entrant,  sunk expenditures by consumers and product differentiation.  
·        Identify and analyze how strategic behavior of incumbents can cause entry barriers.
·        Explain and identify the pricing strategies of a monopolist: linear pricing, two-part tariff, and price discrimination.
·        Numerically calculate three of the approcahes explained: linear pricing, two-part tariff, and price discrimination.
·        What is meant by bundling.

4.1 Market Power   - Reading: Kwanghui.com: Professor Joshua Gans’s Managerial Economics Online: “Market Power” Link: Kwanghui.com: Professor Joshua Gans’s Managerial Economics Online: “Market Power” (HTML)
 
Instructions: Read the entire webpage for Section 4.2.  Please note that this reading covers subunits 4.1.1-4.1.2.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

4.1.1 Price Setting Behavior in the Presence of Market Power   Note: This subunit is covered by the reading assigned under Unit 4.1. 

4.1.2 Determinants of Market Power   Note: This subunit is covered by the reading assigned under Unit 4.1.

4.1.3 Sources of Market Power   - Reading: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach:"Chapter 4, Section 4.1: Sources of Market Power" Link: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach: "Chapter 4, Section 4.1: Sources of Market Power" (PDF)
 
Instructions: If you have not saved this PDF file, you will need to download the PDF file of the book by clicking on the "Download" tab on the right hand side of the webpage.  Please read the introduction to the chapter before reading Section 4.1.  While reading section 4.1, please go through the case studies and the examples to see how theory can be applied and used for analysis in the workings of the firms.  This reading covers subunits 4.1.3.1-4.1.3.3.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

4.1.3.1 Entry Barriers by the Government   Note: This subunit is covered by the reading assigned under Unit 4.1.3. 

4.1.3.2 Structural Characteristics   4.1.3.3 Entry Deterrence by Incumbents   4.2 Pricing Strategies   - Reading: University of Louisville: Professor Barry Haworth’s “Pricing Strategies for the Monopolist” Link: University of Louisville: Professor Barry Haworth’s Pricing Strategies for the Monopolist (HTML)
 
Instructions: Please follow the link to read about the pricing strategies used by a monopolist.  Please go through the numerical examples by clicking on the hyperlinks "price discrimination" and "two-part tariff" under the second and third points respectively.  This reading covers subunits 4.2.1-4.2.3
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

4.2.1 Single Price   Note: This subunit is covered by the reading assigned under Unit 4.2. 

4.2.2 Price Discrimination and Non-Linear Pricing   - Reading: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach:"Chapter 5, Sections 5.1-5.4(5.4.1-5.4.4): Non-Linear Pricing and Price Discrimination" Link: Berkeley Electronic Press: Jeffrey R. Church and Roger Ware's Industrial Organization: A Strategic Approach: "Chapter 5, Section 5.1-5.4 (5.4.1-5.4.4): Non-Linear Pricing and Price Discrimination" (PDF)
 
Instructions: If you have not saved this PDF file, you will need to download the PDF file of the book by clicking on the "Download" tab on the right hand side of the webpage.  Please read the introduction to the chapter before reading Section 5.1.  You may skip section 5.4.5.  This reading covers subunits 4.2.2.1-4.2.2.4.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

4.2.2.1 Examples of Price Discrimination   Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

4.2.2.2 Necessary Conditions   Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

4.2.2.3 Types of Price Discrimination   Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

4.2.2.4 Non-Linear Pricing   Note: This subunit is covered by the reading assigned under Unit 4.2.2. 

4.2.3 More on Pricing Strategies   - Web Media: Flashecon.org: Living Economics' Microeconomic Lectures: Bundling Link: Flashecon.org: Living Economics' Microeconomic Lectures:  Bundling (Adobe Flash)
           
Instructions:  Please click on the play tab to hear this 5 minute lecture on Bundling.
 
Note on the Media: Please note this lecture is based off of R.S. Pindyck’s and D.L. Rubinfeld’s Microeconomics textbook published by Macmillan Publishing Company.
 
Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.
 

  • Reading: Kwanghui.com: Professor Joshua Gans’s Managerial Economics Online: “Pricing Strategies” Link: Kwanghui.com: Professor Joshua Gans’s “Pricing Strategies” (HTML)
     
    Instructions: As you read along, please click on the hyperlinks to learn more about the examples of each form of pricing strategy.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.