ECON 267

Economics 267
The Organization of Industry

Summer 2003
Tu-Th 9:00-12:30 Castleman 201
R. N. Langlois

About the course.

In introductory economics you learned that the supply side of the economy – production – is carried out in units called “firms.”  But what are firms?  How are they organized?  Why and when is economic activity carried out within business firms rather than through market transactions or other forms of organization?  Why do firms behave the way they do – for example, why do they advertise, and how do they innovate?  This course will address these kinds of questions by opening up the “black box” of the firm to see what’s inside.

This course is a companion to Economics 232 (“Government and Industry”), which deals explicitly with public policy, especially antitrust policy and government regulation of business. The two courses overlap a bit, but their emphases are different

Course requirements.

Your grade in the course will be based on two in-class exams.  The first will take place on July 22, the second on August 7, the last day of class.  The exams will count equally.  I will discuss the structure and coverage of the exams during the course of the semester.


I have asked the Coop to order Lynne Pepall, Daniel Richards, and George Norman, Industrial Organization: Contemporary Theory and Practice.  (South-Western, second edition, 2002).  The book provides a deeper background of theory than the lectures will cover, and it also offers a glimpse of how the field or industrial organization is viewed by the mainstream of professional economists.  In fact, however, I will not follow the book closely, and my emphasis will also be rather different.  Moreover, there are links on the online and CD versions of the syllabus to many other useful readings.   The more reading you do, the better you will do in the course. But the readings are an adjunct to, not a substitute for, the class lectures. You will not do very well in this course if you don’t come to class regularly.

Many articles available on the web are in Adobe Acrobat (PDF) format. To read them, you will need the Adobe Acrobat reader. This should already be installed on University microlab computers. But if you don’t have it, you can download it for free.

Sequence of topics.

Competition and monopoly: a review.

  • Pepall, et al., Chapter 1.
  • Review the theory of perfect competition and monopoly in your 112 or 218 textbook, or read pp. 14-47 of Don E. Waldman and Elizabeth J. Jensen, Industrial Organization: Theory and Practice. Addison-Wesley, second edition, 2000.  Another online reference is David Friedman, Price Theory: An Intermediate Text. South-Western, 1990, chapter 10.
  • Paul J. McNulty, “Economic Theory and the Meaning of Competition,” Quarterly Journal of Economics, vol. 82, 1968.

Oligopoly: a beautiful minefield.

Barriers to entry.


  • Pepall, et al., Chapter 10.
  • Robert B. Ekelund, Jr. and David S. Saurman, Advertising and the Market Process A Modern Economic View. San Francisco: Pacific Research Institute, chapters 1-6.

Innovation and intellectual property rights.

      The theory of networks.

          Introduction to the economics of organization.

          Structure of production.

            The market and the firm.

            Asset specificity.

            Monitoring, agency costs, and ownership structure.

            Capabilities and knowledge.

            The old economy and the new economy.