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.

Readings.

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.

• Pepall, et al., Chapters 5, 6, and 7.
• David Friedman, Price Theory: An Intermediate Text. South-Western, 1990, chapter 11.
• Joseph A. Schumpeter, Capitalism, Socialism, and Democracy.  New York: Harper and Brothers, third edition, 1950, chapters VII and VIII.

Barriers to entry.

• George Stigler, The Organization of Industry. Homewood, Ill.: R. D. Irwin, 1968, chapter 6.
• Harold Demsetz, “Barriers to Entry,” American Economic Review 72(1): 47-57 (1982).
• Sidney G. Winter, “Four Rs of Profitability: Rents, Resources, Routines and Replication,” in Cynthia A. Montgomery, ed., Resource-Based and Evolutionary Theories of the Firm: Towards a Synthesis.  Boston: Kluwer Academic Publishers, 1995, pp. 159-167.

Advertising.

• 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.

• Pepall, et al., Chapter 11.
• F. M. Scherer and David Ross, “The Logic of Patent Protection,” excerpt from chapter 17 of Industrial Market Structure and Economic Performance. Houghton-Mifflin, third edition, 1990, pp. 621-630.
• Roberto Mazzoleni and Richard R. Nelson, “Economic Theories about the Benefits and Costs of Patents,” Journal of Economic Issues 32(4): 1031-52 (December 1998).
• Heller, Michael A., and Rebecca S. Eisenberg. “Can Patents Deter Innovation? The Anticommons in Biomedical Research,” Science 280: 698-701 (1 May 1998).

The theory of networks.

• Pepall, et al., Section 12.1.
• Paul A. David, “Clio and the Economics of QWERTY,” American Economic Review 75(2): 332-337 (1985).
• S. J. Liebowitz and Stephen E. Margolis, “The Fable of the Keys,” Journal of Law and Economics 33(1): 1-25 (April 1990).
• S. J. Liebowitz and Stephen E. Margolis, “Path-dependence, Lock-in, and History,” Journal of Law, Economics, and Organization 11: 205-226 (1995).
• Carl Shapiro and Hal R. Varian, “The Art of Standards Wars,” California Management Review 41(2): 8-32 (Winter 1999).

Introduction to the economics of organization.

Structure of production.

• Adam Smith, excerpts from The Wealth of Nations (1776).
• George Stigler, “The Division of Labor Is Limited by the Extent of the Market,” Journal of Political Economy 59(3): 185-193 (1951).
• Axel Leijonhufvud, “Capitalism and the Factory System,” in R. N. Langlois, ed., Economic as a Process: Essays in the New Institutional Economics. New York: Cambridge University Press, 1986, chapter 8.

The market and the firm.

• Ronald Coase, “The Nature of the Firm,” Economica (N.S.) 4: 386-405 (November 1937).

Asset specificity.

• Oliver E. Williamson, “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology 87(3): 548-577 (November 1981).
• Oliver E. Williamson, “Credible Commitments: Using Hostages to Support Exchange,” The American Economic Review 73(4): 519-540 (September 1983).
• Symposium on the General Motors-Fisher Body case, Journal of Law and Economics, Vol. 43, No. 1, April 2000, especially the papers by Klein and Freeland.

Monitoring, agency costs, and ownership structure.

• Armen Alchian and Harold Demsetz, “Production, Information Costs, and Economic Organization,” American Economic Review 62(5), December 1972).
• Eugene F. Fama and Michael Jensen, “The Separation of Ownership and Control,” Journal of Law and Economics 26(2): 301-27 (June 1983).
• Eugene F. Fama and Michael Jensen, “Agency Problems and Residual Claims,” Journal of Law and Economics 26(2): 327-50 (June 1983).
• Henry Hansmann, “The Ownership of Enterprise,” Journal of Law, Economics, and Organization 4(2): 267-304 (Fall 1988).

Capabilities and knowledge.

• F. A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35(4): 519-530 (1945) (JStor version.)
• G. B. Richardson, “The Organisation of Industry,” Economic Journal 82(327): 883-896 (1972).

The old economy and the new economy.

• Alfred D. Chandler, “Organizational Capabilities and the Economic History of the Industrial Enterprise,” Journal of Economic Perspectives 6(3): 79-100 (1992).
• Richard N. Langlois, “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism,” Industrial and Corporate Change 12(2): 351-385 (April 2003).