Industrial
Organization
Final Exam
Monday June 9, 2014
1:30 pm
The final exam will be comprehensive. You should review the material we covered for Exam One and Exam Two . You will probably want a calculator for this exam.
I. Telecommunications
A. Natural monopoly
1. cheaper
for one firm to serve market than for 2 or more firms
2. large
set up costs
3. network
externalities
a. value to user increases as total number of users increase
b. advantage to service with lead
4. maintaining
a large number of competing wire networks is not efficient
5. natural
monopoly not suited to break-up
a. public
ownership (
b.
regulation (US)
B. Regulation
1. government
approves telephone rates (prices), services, returns, investments
2. Federal and
State agencies
a. FCC
b. Public
Service Commissions and Public Utility Commissions
C. AT&T
1. vertically integrated regulated
monopolist
a. Bell Labs
(research)
b. Western
Electric (manufacturing)
c. Long
lines department (long distance telephone service)
d. local
operating companies (local phone service)
2. only
local service was true natural monopoly
a. firms
tried to enter other sectors
b. AT&T
responds aggressively
i. selective price cuts
ii. denies connection to
iii. regulators suppress competition
3. Policy
a. early
antitrust suits result in minor conduct agreements
b. FCC rule
changes
i. competing equipment can be connected to system
ii. long distance service
-MCI, Sprint (gradual entry after 1970)
c. Section 2
monopolization case filed 1974
i. long expensive case
ii. Judge rules probable antitrust violation
iii. AT&T agrees to break-up (1982)
4. Divestiture
a. largest
antitrust break-up
b. AT&T:
Bell Labs, Western Electric, Long distance
c. Regional
Bell Operating Companies (RBOC)
i. local phone service
ii. 7 independent "Baby Bells"
-
d. effects
of break-up
i. quality remained high
ii. long distance prices fell substantially
- MCI and Sprint gain market share by cutting price
- prices and market share stabilize: tight oligopoly
iii. AT&T undergoes further restructuring
iv. local Bells prosper
v. innovation increases
D. Structural change
1. new
entry into long distance transmission
a. firms
specializing in data transfer
b. internet
backbone
c. Qwest,
WorldCom, and others
2. Telecommunications Act of 1996
a. opened
local markets to competition
i. Competitive Local Exchange Carriers
ii. CLEC
b. allowed
RBOCs to sell long distance service, once local competition was established
3. mergers
a. WorldCom
merges with MCI
b. Qwest
buys US West
c. RBOCs
merge
i. Verizon formed by Nynex- Bell
Atlantic merger
i. SBC purchases three remaining RBOCs
ii. SBC purchases failing parent company AT&T (and re-names
itself at&t
E. Intellectual Property
I. Patent
1. protects
ideas
a. novel
b. non-obvious
c. useful
2. registration
required
3. short
protection
-- 20 years
4. rights can be
transferred
5. use requires
approval
F. Development of cell phone
industry
a. slow development under
pre-break-up AT&T
b. RBOCs get cell service
c. FCC auctions spectrum
i. goal:
competition
ii. new entrants
d. mergers
i. concentration
increases
-- Verison,
AT&T, Sprint, T-Mobile
ii. proposed AT&T T-Mobile merger blocked
iii. 2014 proposed mergers
A. Mainframes
1. product
differentiation
a.
incompatible systems
b. software
lock in
2. technological
change
3. economies
of scale
a. research
and development
b. high set
up costs
4. network
externalities
a.
usefulness increases with total number of users
b. advantage
to industry leader
5. Dominant firm
B. IBM
1. fast
second strategy
2. pre-announcement
of products
3. tying
4. price
discrimination
5. aggressive
response to entry
C. Antitrust case (IBM)
1. Sherman Act
Section two (monopolization)
2. filed
1969
3. dropped
1982
4. unresolved
issues
a. when is
pricing predatory
b. how much
power can a dominant firm use against rivals
D. Microcomputers
1. IBM late
entrant in market
2. chooses
open architecture
a. network
externalities
b. microchip
from Intel
c. operating
system from Microsoft
3. IBM market share peaks at 80%
4. entry
a. rivals
buy Intel chip, Microsoft software
b.
compatible computer
c. IBM's
market share erodes rapidly
5. hardware
manufacturing becomes very competitive
a. low cost
producers displace IBM
b. low
margin, commodity business
E. Mainframes today
1. large enterprise users
a. banks
b. financial markets
c. government
d. corporations
2. batch
processing
a. power
b. thousands to millions of
transactions
c. reliability
3. Internet servers
a. process large amounts of
content (images, video, text, data)
b. competition from clusters
of low-cost microprocessors
III. Software
A. Economics
1. software
characteristics favor one dominant firm
a. large
economies of scale
i. high set up costs
ii. low marginal costs
b. network
externalities (for operating systems)
c. Dominant firm
B. Microsoft
1. Microsoft conduct
a.
exclusionary licensing
b. technical
incompatibilities
c. tying
i. Word, Excel, Powerpoint
ii. Internet Explorer
d.
pre-announcement of programs
C. Microsoft Antitrust
1. consent
decree (1994)
2. monopolization
case (1998)
3. Microsoft found guilty of
violating Sherman Act
a. court
orders break up
b. appeal
c. break-up
reversed
d.
settlement (2001)
e. States
argue for stricter remedy (most cases settled 2003)
4. European antitrust case
a. similar grounds
b. Microsoft guilty:
large fine
5. Private cases
a. guilty finding
hurts Microsoft's defense
b. treble damages
c. pays large dollar
amounts to settle claims by several firms
A. Characteristics
1. integrated
circuits on microchip
2. rapid
technological advance
3. Economies of scale
a. research
and development
b. set up
costs
B. Learning curves
1. production
process improves with experience
a. costs
inversely related to total production (over time)
b. marginal
cost may be substantially less than material costs
2. cost
advantage to industry leader
a. strategic
pricing
b. dominant
firm
3. limits to learning curve
advantage
a. eventual
flattening of learning curve
b. buyers
desire second source
c. spillover
d.
production constraints during early stages
C. Dominant firms
1. Intel
V. Internet
A.
Communications protocol
1. standards for data transfer
2. set by committees
B. Hardware
1.
network of networks
2. network costs paid by individual network
3. access fees
C. Software/content/sites
D. Copyright
1. protects
expression
2. exists at
creation
3. lengthy
protection
a. corporate 95 years
b. enters public
domain after expiration
4. rights can be
transferred
5. protection is
narrow
a.
protects direct copies (“pirated”)
b. does not protect
function/feel
E. History
1. public development
2. commercialization came later
F. Disruptive technology
1. Creative destruction
2. new competitors
3. copyright violations
- proposed legislation: PIPA, SOPA, ACTA
G. Leading Internet sites
1. network externalities
2. set-up costs
3.
intellectual property
H. Agglomeration economies
1. spatial clustering
2. positive externalities
a. specialized
labor markets
b. finance
c. specialized
services
d. information flow
I. Net Neutrality
A. Economies of scale
1. brewing:
dimensional economies
2. bottling
3. small
breweries (1-2 million barrels/year) face substantially higher costs than a 4
million brewery
4. modest
additional cost savings out to 8 million barrels/year
B. Transportation cost
1. originally
many small local brewers
2. technological
change allows national shipping
a. transportation cost:
original source of price premium for shipping brewers
b. premium
image developed
c.
belief: high price = high quality
d.
brand image advantage to early shippers
C. Structural change
1. multiplant production
a. lower
transportation costs for national brewers
b. premium
image remains
c. higher
profits-- more advertising
2. local
and regional brewers squeezed out
3. market
concentration increases substantially
a. Herfindahl index increases from H = 140 (1947) to H = 2789
(1998)
b. tight
oligopoly
D. Beer mergers vs. internal growth
1. Anheuser Bush and American Brewing Co
(
a. court requires sale
b. court restricts future
mergers by Anheuser Bush for 5 years
2. Pabst and Blatz
(1958)
a. court orders sale
of Blatz (1959)
b. Heileman
buys remaining Blatz assets
3. national leaders
(A-B, Miller, Coors) grow by building new breweries
4. regional and local
mergers allowed
a. locals unable to
compete
b. failing firm
defense
5. Consolidation
a. Heileman
acquires over a dozen brewers
b. Stroh acquires
Schafer, Schiltz, Heileman
then fails
c. Miller and Pabst
split Stroh's brands and assets
d. Pabst contracts all
brewing to other manufacturers
e. minor impact on
market concentration
- mergers were an exit strategy for failing firms
6. International mergers
a. SAB purchased Miller (2002)
b. Interbrew
AmBev merger (2004)
c. Molson Coors merger (2005)
d. InBev purchases Anheuser-Busch (2008)
e. Miller-Coors joint venture
(2008)
f. A-B-InBev purchased Modelo (2013)
E. Trademark
a. intellectual property: name,
symbol, device
b. registration
c. no expiration
d. rights can be transferred
e. protection is narrow
f. economic reasons for protection
i. information
ii. quality
g. trademarks are very
valuable in beer industry
F. Product differentiation
1. most
American beer has a similar mild flavor (little horizontal differentiation)
2. in blind
taste tests, consumers can not distinguish brands
3. but,
consumers are willing to pay more for premium brands (vertical differentiation)
4. price
quality heuristic
5. market
segments
a. Craft
b. Imports
c. Superpremium
d. Premium
e. Popular (economy/ value-priced)
G. Rise of horizontal differentiation
1. Imports grow substantially
a. transportation
costs lead to higher price
b. premium image
develops
c. some brands have stronger
flavors
2. Growth of craft brewing
a. small breweries
b. strong flavors
c. high level of product
differentiation
H. Craft beers
1. microbreweries
a. very high costs due
to suboptimal scale
b. product
differentiation from strong flavor
c. many avoid
transportation costs and advertising costs
d. high prices and
super-premium image
2. contract
brewing
a. make use of excess
capacity of regional brewers
b. costs above
national brewers, less than microbreweries
c. superpremium
image
3. Substantial growth
4. national
firms imitate style
a. Leinekugels
(Miller)
b. Kilian's
Red, Blue Moon (Coors)
c.
5. wide range of consumer choices
V Industrial Organization and Public
Policy
Industrial Organization and Public Policy