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Industrial Organization for Entrepreneurs (MiE)

Industrial organization is a field of microeconomics that explores the dynamics of industries and in particular the way firms compete with each other. Therefore, this course focuses on strategic competitive behavior, with special attention being paid to the perspective of newly founded ventures. Within this context we will discuss how to assess market power /structure and its implications, pricing mechanisms, as well as how regulations impact strategy design. The course uses a mixture of case studies, lectures, guest lectures and a final written exam.
Course code
ECON502
Course type
MSc Course
Weekly Hours
2,5
ECTS
5
Term
HS 2019
Language
Englisch
Lecturers
Dr. S. Ramachandran
Please note that exchange students obtain a higher number of credits in the BSc-program at WHU than listed here. For further information please contact directly the International Relations Office.

Economics does not teach us how to live: it helps us understand the world we live in. This course examines some aspects of firms that now produce most of what we consume. Why are large firms typical in some industries (e.g. automobiles, mining, steel making) while small firms abound in other industries (e.g. barbershops, bakeries)? Why are firms of different sizes even within an industry? Why do some firms make everything themselves (e.g. pharmaceuticals) while other firms design and sell items they neither make nor even assemble (e.g. Apple’s I-phone)? These are interesting questions that the course will help you answer.

Industrial Organisation (I-O) emerged as a specialized field primarily to enforce competition policy. Some European governments sought “national champions” but the U.S. sought to prevent monopolies and firms from colluding. Railways, electric utilities, radio broadcasters, airlines etc. were regulated since the late 1800s, and academic economists developed various theories to detect and remedy the resulting harm through regulations.

These regulations were assumed to work until a few skeptical economists found in the 1970s that regulated prices were higher, not lower. Regulations were worse than ineffective: they favoured the incumbent! As these surprising findings were replicated, the entire field changed: theory of regulatory capture showed how regulations are enacted and operate. Both information and incentive to act appropriately are often absent. The deregulation movement followed: airline and telecom deregulation have been hugely successful, but electricity deregulation in California was a disaster (we will examine why). After the 2008 financial crisis, the regulatory pendulum has since been swinging back, but effective regulation remains a challenge.

Date Time
Tuesday, 29.10.2019 08:00 - 11:15
Thursday, 31.10.2019 08:00 - 11:15
Thursday, 07.11.2019 08:00 - 13:00
Wednesday, 13.11.2019 08:00 - 11:15
Friday, 06.12.2019 09:45 - 11:15
What is a firm?Most standard textbooks cover the basic cost curves that you should review. One classic textbook is:F. M. Scherer & David Ross (1990) Industrial Market Structure & Economic Performance 3rd edition Houghton Mifflin & Co. ISBN-13:978-0395357149Articles that greatly influenced the field are generally in academic journals, and these remain interesting even decades later.George Stigler The Citizen and the State (University of Chicago Press, 1975 ISBN 0-226-77429-5) is a collection of essays on regulation by a pioneer in the field who got a Nobel Prize in 1982.Ronald Coase (1937) Nature of the Firm Economica Vol 4, No.16Cost of market transactions versus managerial direction within a firm.Arman A. Alchian and Harold Demsetz (1972) Production, Information Costs & Economic Organisation, American Economic Review, Vol.62, No.5Kumar, Rajan & Zingales (2001) “What Determines Firm Size?”Size distribution of firms:https://faculty.chicagobooth.edu/chang-tai.hsieh/research/missingmiddle.pdfMonopoly & Anti-trustThese are long readings: interesting if you have the time, but skim otherwise.The Federal Trade Commission (FTC) website has a good account of its history with references (not comprehensive) to other articles.https://www.ftc.gov/about-ftc/what-we-doEdward Levi (1947) “The Anti-Trust Laws and Monopoly” The University of Chicago Law Review Vol.14 No.2 downloadable at:http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5444&context=journal_articlesGood survey of legal history, but presumes knowledge of US history, politics and legal structure.This is a shorter piece:Robert L Bradley Jr (1990) “On the Origins of the Sherman Act”This recent article has been widely cited because of its cogent criticism of the “Chicago School”Lina M. Khan (2017) “Amazon’s Anti-Trust Paradox” Yale Law Journal, Vol. 126, No.3 January pp 564-907 downloadable at:https://www.yalelawjournal.org/pdf/e.710.Khan.805_zuvfyyeh.pdfNetflix: Pricing Decision 2011: case for discussionA Theory of RegulationGeorge Stigler (1971) “The Theory of Economic Regulation” The Bell Journal of Economics and Management Science Vol.2, No.1 pp 3-21Data on political contributions:https://www.opensecrets.org/industries/indus.php?ind=N01The White House (2015) “Occupational Licensing: A Framework for Policymakers” Airline DeregulationJohn Howard Brown (2014) “Jimmy Carter, Alfred Kahn and Airline Deregulation” The Independent Review, Vol 19, No.1Alfred E Kahn (1988) “Surprises of Airline Deregulation” American Economic Review, Vol.72, No2 pp 316-322Alfred E Kahn (2001) “Whom the Gods would Destroy or How Not to Deregulate” AEI-Brookings Joint Centre for Regulatory StudiesElectricity Regulation & DeregulationAbout how a CCG plant generates powerhttps://powergen.gepower.com/resources/knowledge-base/combined-cycle-power-plant-how-it-works.htmlThe Federal Energy Regulatory Commission Report (2005) to Congress on California Electricity crisis:https://www.ferc.gov/legal/staff-reports/comm-response.pdfPaul L. Joskow (2008) “Lessons Learned from Electricity Market Liberalisation” The Energy JournalSweeney (2005) “Lessons for the Future” is an excellent account of what happened in CaliforniaDescribes the German legal framework for electricity (in English)http://us.practicallaw.com/5-524-0808HBS RWE and the Proposal for a German Electricity Regulator
“Lectures” are structured class discussions in which I expect all students to actively participate. I will call on you by name, and I know (from my previous WHU teaching) that many will initially be intimidated; but improving how you articulate and defend your views ─ and respectfully hear dissenting views are valuable skills in the business world.

It would help to know some economics, particularly Price Theory (i.e. Microeconomics), but having an open and skeptical mind is more important. Everyone can understand the reasoning and my summaries of the main findings, and those with statistics and econometrics can read salient studies for themselves.

Your effort determines what you learn. There is plenty to read, and the suggested readings (listed below after the outline of lectures) are a starting point. WHU students often get by without reading, but some path-breaking articles on the list are well worth the effort. But you must question what you read. The examination will test your understanding, not your reproducing the articles or class discussions.

Stop by my office(no appointment needed) to discuss any question or concern.

  • 40% written exam
  • 30% case study (individual)
  • 30% class participation
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