Industrial Organization (MiM)

How do markets work and influence the strategic competitive behaviors of firms? And how do regulations influence markets and how firms compete with each other? Industrial organization is a field of microeconomics concerned with providing answers to these important questions. While none of you might become regulators, all of you will encounter regulations and markets as managers. The current “Big Tech Hearing” in the U.S. provides an example for how market power may influence industries and how public policy may influence a firm’s actions. Therefore, it is important to understand how markets work and influence the strategic competitive behaviors of firms. The main objective of this course is thus to provide an overview of this important topic. Specifically, we will focus on the following questions:

• What is market power and how is it related to a firm’s strategic competitive behaviors?
• How do firms use certain pricing mechanisms to maximize profits?
• How do markets influence innovation – and how does innovation affect market structure?
• How do technological change andnew digital business models affect markets and competition?
• How do regulations affect the strategic decision making in firms? And how effective are regulatory frameworks in the digital economy?

The course consists of 8 sessions and uses a mixture of lectures, case studies, classroom discussions, and guest lectures.

Session 1: Introduction - What is Industrial Organization?

(October 29, 15:30 - 18:45)

• What are the fundamental themes of industrial organization?
• What is market power and how is it related to a firm’s strategic actions?
• Is there a role for public policy regarding market power?
• Discussion of the “Big Tech Hearing” in the United States
• What are the applications of Game theory to the industrial organization studies?

Required Readings:

• Cabral, L.M.B. (2001) Introduction to Industrial Organization. MIT Press. pp. 1-11.
• McNamee, R. (July 2020). A historic antitrust hearing in Congress has put big tech on notice,The Guardian,https://www.theguardian.com/commentisfree/2020/jul/31/big-tech-house-historic-antitrust-hearing-times-have-changed
• Romm, T. July 2020. Amazon, Apple, Facebook and Google grilled on Capitol Hill over their market power, The Washington Post, https://www.washingtonpost.com/technology/2020/07/29/apple-google-facebook-amazon-congress-hearing/
• Feiner, L. July 2020. Tech competitors are ‘blown away’ by Congress’ CEO grilling and hopeful for antitrust reform,https://www.cnbc.com/2020/07/31/big-tech-competitors-were-blown-away-by-house-antitrust-ceo-hearing.html

Session 2: Pricing Strategies

(November 03, 15:30 - 18:45)

• How do firms use various pricing strategies for revenue maximization?
• How does a firm with market power set its basic prices?
• Why are some customers charged higher prices for the same product than others?
• Why do firms offer special discounts for certain customer groups?
• Discussion of Apple case study

Required Readings:

• Cabral, L.M.B. (2001) Introduction to Industrial Organization. MIT Press. pp. 167-183.
• Why Apple made the unusual move to sell its streaming service for next to nothing,https://www.cnbc.com/2019/09/11/the-apple-tv-pricing-strategy-explained.html
• Apple case

Session 3: Technological Change, Innovation, and Digital Business Models

(November 11, 08:00 - 11:15)

• How does innovation affect or change markets and competition?
• And how do markets influence or even incentivize innovation?
• Why do R&D expenditure vary among industries?
• How do technological change and new digital business models disrupt markets and competition?
• Which challenges are existing regulations facing in times of digital economy?

Required Readings:

• Cabral, L.M.B. (2001) Introduction to Industrial Organization. MIT Press. pp. 291-308.
• Stalk, G., Stewart, S. Tempo and the Art of Disruption.BCG Henderson Institute,https://www.bcg.com/de-de/publications/2019/tempo-art-of-disruption
• Beck, Libert. 2018. Three Signals Your Industry Is About to Be Disrupted, MIT Sloan Management Review, https://sloanreview.mit.edu/article/three-signals-your-industry-is-about-to-be-disrupted/
• Light, S. 2018. When Business Blows Up Policy: How to Regulate Disruptions, Wharton Podcast and article: https://knowledge.wharton.upenn.edu/article/when-business-blows-up-policy-how-to-regulate-disruptions/

Session 4: Guest Lecture: Zalando (details will be provided in due course)

(November 16, 11:30 - 15:15)

Session 5: Uber Case Study

(November 19, 15:30 - 18:45)

• How did Uber disrupt/change the industry?
• What kind of pricing mechanisms is Uber using?
• How did competitors respond to the entry of Uber?
• How do different national regulatory frameworks influence Uber? What kind of regulatory problems is Uber facing and what might be possible solutions?
• How effective are regulatory frameworks in times of the digital economy?

Required Readings:

• Uber case study: “Uber: Competing Globally”
• Can Uber Overcome Its Regulatory Obstacles? https://knowledge.wharton.upenn. edu/article/can-uber-overcome-regulatory-obstacles/
• Uber and Lyft must classify drivers as employees, judge rules, in blow to gig economy, The Guardian,https://www.theguardian.com/technology/ 2020/aug/10/uber-lyft-ruling-california-judge

Session 6: Airbnb Case Study

(November 25, 08:00 - 11:15)

• How did Airbnb disrupt/change the industry?
• How do regulatory frameworks influence and threaten the success of Airbnb?
• How can Airbnb cope with the challenges?
• How should private companiesandgovernments navigate regulatory gray area

Required Readings:

• Airbnb case study: “Airbnb in Amsterdam”

• EU court rules Airbnb does not require estate agent licence, The Guardian,https://www.theguardian.com/technology/2019/dec/19/eu-court-rules-airbnb-does-not-require-estate-agents-licence

• Airbnb to America’s Big Cities: See You in Court,https://www.bloomberg.com/graphics/2020-airbnb-ipo-challenges/

Session 7: Google Case Study

(November 26, 15:30 - 18:45)

• What are the principal goals of competition policies?
• Which challenges do competition policies face in the digital economy?
• Why did Margarethe Vestager issue a statement of objections against Google Search?

Required Readings:

• Google case study: “Google in Europe: Competition Policy in the Digital Era”
• Margrethe Vestager to hit Google with another fine, https://www.ft.com/content/c9299f64-465a-11e9-a965-23d669740bfb
• ‘This Is a New Phase’: Europe Shifts Tactics to Limit Tech’s Power,https://www.nytimes.com/2020/07/30/technology/europe-new-phase-tech-amazon-apple-facebook-google.html

Session 8: Review and Wrap up

(December 03,11:30 – 13:00)

Book: Cabral, L.M.B. (2001) Introduction to Industrial Organization. MIT Press.Articles and cases as mentioned in the Syllabus as well as in the lecture (will be provided in Moodle).

Final grades are determined on the following basis:

• 50% case-based group assignment and presentation
• 40%case-based individual assignment
• 10% class participation

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