DEPARTMENT OF

ECONOMICS
FACULTY OF ARTS

MARKET POWER: THEORY AND POLICY

WINTER 2015

Dr. Claudia M. Landeo

Tory 7-25
[email protected]

CLASS TIME

This class meets on Mondays and Wednesdays from 12:30 to 1:50 (T B 104). This is a 3 credit course.

OFFICE HOURS

My office hours are Fridays from 11:00 to 12:30. Also, please feel free to contact me -- e-mail is best --
with questions or to set up an appointment.

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 COURSE DESCRIPTION

This course presents the fundamentals of market power and antitrust economics. The class sessions
include both traditional lectures and discussions of real-world examples. The lecture topics will
encompass abstract frameworks and theoretic approaches. The real-world examples are selected for both
their market power and antitrust content, and their policy relevance.

The main course material is divided into four parts. The first part presents the basic frameworks for the
analysis of antitrust institutions. The topics include game theoretic and experimental economics methods.
The second part is concerned with vertical restraints. Topics include exclusive dealing contracts, vertical
integration, and tying and bundling practices. The third part takes a different view of antitrust institutions,
considering horizontal mergers. The fourth part covers additional important topics in antitrust economics,
including price fixing, and enforcement and leniency policies.

TEACHING METHOD

The class will consist of a combination of lectures and class discussion. I expect students to come to class
prepared. Student preparation of assigned materials and involvement in class discussion is essential for
the success of the course.

WEB PAGE

Lecture notes and other materials will be posted to the class web page.

READINGS

The reading material encompasses a set of economics articles. Details are provided below.

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 GRADING AND REQUIREMENTS

Requirements include a midterm exam (35%), a group paper (35%), two group progress reports and two
20-minute presentations of those reports (20%), and class participation (10%).

 The midterm exam will be given on Wednesday, March 18.

 The two group progress reports are due on Wednesday, February 25 and Wednesday, March 25.
The two progress report presentations are scheduled on Monday, March 2 and Monday, March 30.
Under no circumstances late reports or late presentations will be accepted.

 The group paper is due on Wednesday, April 8. Under no circumstances late papers will be
accepted.

o The topic should be proposed by the group and approved by the professor. Deadline to submit
the topic for approval: Monday, February 2.
o Group paper length: 1-inch margin, 30 double-space pages (maximum; including cover page,
abstract, tables, graphs, and references).
o References: 20 journal articles (minimum) should be discussed in the paper.

ACADEMIC INTEGRITY

It is assumed that students are familiar with the codes of academic integrity. Violation of these codes will
result in a zero grade for the relevant assignment/exam and a letter of report to the Dean. Students are
expected to formulate and write their own solutions on the midterm exam. The group paper should clearly
state all the sources used to construct the document.

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 PART 1: INTRODUCTION AND BASIC FRAMEWORKS

WEEK 1: INTRODUCTION TO MARKET POWER AND ANTITRUST ECONOMICS

Readings:

1. Market Power, Antitrust Law and Economic Theory.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

Landeo, C.M., “Exclusionary Vertical Restraints: Experimental Law and Economics

Contributions.” In Zeiler, K. and Teitelbaum, J. (eds.), The Research Handbook of Law
and Economics. E. Elgar Publishing, 2015.

WEEKS 2 – 3: GAME THEORY TOOLS

Readings:

1. Basic Components.

Mass-Colell, Whinston and Green, “Chapter 7 – Basic Elements of Noncooperative

Games.” In Mass-Colell, Whinston and Green, Microeconomic Theory: New York: Oxford
University Press, 1995.

2. Main Equilibrium Concepts and Repetition.

Mass-Colell, Whinston and Green, “Chapter 8 – Simultaneous-Move Games” and

“Chapter 9 – Dynamic Games.” In Mass-Colell, Whinston and Green, Microeconomic
Theory: New York: Oxford University Press, 1995.

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 WEEKS 3 – 4: EXPERIMENTAL ECONOMICS METHODS

Readings:

1. Basic Components.

Davis, D.D. and Holt, C.A., “Chapter 1 – Introduction and Overview.” In Davis, D.D. and
Holt, C.A., Experimental Economics. New Jersey: Princeton University Press, 1993.

Davis, D.D. and Holt, C.A., “Chapter 9 – Economic Behavior and Experimental Methods:
Summary and Extensions.” In Davis, D.D. and Holt, C.A., Experimental Economics. New
Jersey: Princeton University Press, 1993.

2. An Application.

Landeo, C.M. and Spier, K.E. (2009), “Trigger Happy or Gun Shy? Dissolving Common-
Value Partnerships with Texas Shootouts,” RAND Journal of Economics, pp. 649 – 673.

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 PART 2: VERTICAL RESTRAINTS

WEEKS 5 – 6: EXCLUSIVE DEALING CONTRACTS

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Bernheim, B.D. and Whinston, M.D. (1998), “Exclusive Dealing,” Journal of Political
Economy, pp. 64-103.

Landeo, C.M., “Exclusionary Vertical Restraints: Experimental Law and Economics

Contributions.” In Zeiler, K. and Teitelbaum, J. (eds.), The Research Handbook of Law
and Economics. E. Elgar Publishing, 2015.

Landeo, C.M. and Spier, K.E. (2009), “Naked Exclusion: An Experimental Study of
Contracts with Externalities,” American Economic Review, pp. 1850-1877.

Landeo, C.M. and Spier, K.E. (2012), “Exclusive Dealing and Market Foreclosure: Further
Experimental Results,” Journal of Institutional and Theoretical Economics, pp. 150-170.

Sass, T.R. (2005), “The Competitive Effects of Exclusive Dealing: Evidence from the U.S.
Beer Industry,” International Journal of Industrial Organization, pp. 203-225.

Segal, I. and Whinston, M. (2000). “Naked Exclusion: Comment,” American Economic

Review, pp. 296-309.

Rasmusen, Ramseyer, and Wiley (1991), “Naked Exclusion,” American Economic Review,
pp. 1137-1145.

Whinston, M.D., Lectures on Antitrust Economics. Cambridge, Mass: MIT Press, 2008.

[TOPIC SUBMISSION DUE ON MONDAY, FEBRUARY 2 – BEGINNING OF CLASS]

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 WEEKS 6-7: VERTICAL INTEGRATION

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Hart, O., Tirole, P., Carlton, D.W., and Williamson, O.E. (1990), “Vertical Integration and
Market Foreclosure,” Brookings Papers on Economic Activity: Microeconomics, pp. 205-
286.

Landeo, C.M., “Exclusionary Vertical Restraints: Experimental Law and Economics

Contributions.” In Zeiler, K. and Teitelbaum, J. (eds.), The Research Handbook of Law
and Economics. E. Elgar Publishing, 2015.

Lafontaine, F. and Slade, M. (2007), “Vertical Integration and Firm Boundaries: The
Evidence,” Journal of Economic Literature, pp. 629-685.

Martin, S., Normann, H.-T., and Snyder, C.M. (2001), “Vertical Foreclosure in
Experimental Markets,” RAND Journal of Economics, pp. 466-496.

Normann, H.-T. (2011), “Vertical Mergers, Foreclosure and Raising Rival’s Costs:
Experimental Evidence,” Journal of Industrial Economics, pp. 506-527.

Ordover, J., Salop, S., and Saloner, G. (1990), “Equilibrium Vertical Foreclosure.”
American Economic Review, pp.127-142.

Rey, P., and Tirole, J., “A Primer on Foreclosure.” In Armstrong, M. and Porter, R, The
Handbook of Industrial Organization. North Holland: Amsterdam, 2007.

Whinston, M.D., Lectures on Antitrust Economics. Cambridge, Mass: MIT Press, 2008.

[FIRST GROUP REPORT DUE ON WEDNESDAY, FEBRUARY 25 – BEGINNING OF CLASS]

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 WEEKS 7-8: TYING AND BUNDLING

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Hinloopen, J., Müeller, W., and Normann, H.-T., 2014. “Output Commitment through
Product Bundling: Experimental Evidence,” European Economic Review, pp. 228-229.

Landeo, C.M., “Exclusionary Vertical Restraints: Experimental Law and Economics

Contributions.” In Zeiler, K. and Teitelbaum, J. (eds.), The Research Handbook of Law
and Economics. E. Elgar Publishing, 2015.

Nalebuff, B. (2004), “Bundling as an Entry Barrier,” Quarterly Journal of Economics,

pp.159-187.

Martin, S. (1999), “Strategic and Welfare Implications of Bundling,” Economics Letters,

pp. 371-376.

Whinston, M.D. (1990), “Tying, Foreclosure, and Exclusion,” American Economic

Review, pp. 837-859.

[FIRST GROUP PRESENTATION ON MONDAY, MARCH 2]

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 PART 3: HORIZONTAL PRACTICES
WEEKS 9-10: HORIZONTAL MERGERS

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook of
Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Beckman, S.R., DeAngelo, G., and Smith, J.W. (2012), “Experiments on Horizontal Mergers:
Does Size Matter?, Economics Letters, pp. 537-539.

Borenstein, S. (1990), “Airline Mergers, Airport Dominance, and Market Power,” American
Economic Review, pp. 400-404.

Bernheim, B.D. and Whinston, M.D. (1985), “Multimarket Contact and Collusive Behavior,”
RAND Journal of Economics, pp. 1-26.

Farrell, J. and Shapiro, C. (1990), “Horizontal Mergers: An Equilibrium Analysis,” American

Economic Review, pp. 107-126.

Huck, S., Normann, H.-T., Oechssler, J. (2004), “Two Are Few and Four Are Many: Number
Effects in Experimental Oligopolies,” Journal of Economic Behavior and Organization, pp.
435-446.

Kim, E.H. and Singal, V. (1993), “Mergers and Market Power: Evidence from the Airline
Industry,” American Economic Review, pp. 549-569.

Phillips, O. and Mason, C. (1992), “Mutual Forebearance in Experimental Conglomerate

Markets,” RAND Journal of Economics, pp. 395-414.

Selten, R. (1973), “A Simple Model of Imperfect Competition, Where Four Are Few and Six
Are Many,” International Journal of Game Theory, pp. 141–201.

Whinston, M.D., Lectures on Antitrust Economics. Cambridge, Mass: MIT Press, 2008.

[MIDTERM EXAM ON WEDNESDAY, MARCH 11]

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 PART 4: PRICE FIXING, ENFORCEMENT AND LENIENCY
PROGRAMS

WEEKS 10-11: PRICE FIXING

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Athey, S. and Bagwell, K. (2001), “Optimal Collusion with Private Information,” RAND
Journal of Economics, pp. 428-465.

Block, K.B., Nold, F.C., and Sidak, J.G. (1981), “The Deterrent Effect of Antitrust
Enforcement,” Journal of Political Economy, pp. 429-445.

Crawford, V. (1998), “A Survey of Experiments on Communication Via Cheap Talk,”

Journal of Economic Theory, pp. 286-298.

Dufwenberg, M., Gneezy, U. (2000), “Price Competition and Market Concentration: An

Experimental Study,” International Journal of Industrial Organization, pp. 7-22.

Fonseca, M.A. and Normann, H.-T. (2012), “Explicit vs. Tacit Collusion – The Impact of
Communication in Oligopoly Experiments,” European Economic Review, pp. 1759-1772.

Holt, C., “Industrial Organization: A Survey of Laboratory Research.” In Kagel, J. and

Roth, A. (eds.), The Handbook of Experimental Economics, Princeton NJ: Princeton
University Press, 1993.

Sproul, M.F. (1993), “Antitrust and Prices,” Journal of Political Economy, pp. 741-754.

Whinston, M.D., Lectures on Antitrust Economics. Cambridge, Mass: MIT Press, 2008.

White, L.J. (2001), “Lysine and Price Fixing: How Long? How Severe?, Review of
Industrial Organization, pp. 23-31.

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 WEEKS 11 – 12: ENFORCEMENT AND LENIENCY PROGRAMS

Readings:

1. Legal and Policy Aspects.

Kaplow, L. and Shapiro, C., “Antitrust.” In Polinsky, M. and Shavell, S., The Handbook
of Law and Economics, Elsevier, 2007.

2. Economic Theory and Empirical Evidence.

Apestegui, J., Dufwenberg, M., and Selten, R., “Blowing the Whistle,” Economic Theory,
pp. 143-166.

Bigoni, M., Sven-Olof, F., Le Coq, C., Spagnolo, G. (2012), “Fines, Leniency, and
Rewards in Antitrust,” RAND Journal of Economics, pp. 368-390.

Harrington, J. (2008), “Optimal Corporate Leniency Programs,” Journal of Industrial

Economics,” pp. 215-246.

Harrington, J. and Chang, M. (2009), “Modelling the Birth and Death of Cartels with an
Application to Evaluating Antitrust Policy, “Journal of European Economic Association,
pp. 1400-1435.

Hinloopen, J. and Soetevent, A.R. (2008), “Laboratory Evidence on the Effectiveness of

Corporate Leniency Programs,” RAND Journal of Economics, pp. 607-616.

Miller, N. (2009), “Strategic Leniency and Cartel Enforcement,” American Economic

Review, pp. 750-768.

Motta, M. and Polo, M. (2003), “Leniency Programs and Cartel Prosecution,”

International Journal of Industrial Organization, pp. 347-379.

Spagnolo, G. (2004), “Divide et Impera: Optimal Leniency Programs,” Discussion Paper

No. 4840, CEPR.

[SECOND GROUP REPORT DUE ON WEDNESDAY, MARCH 25 – BEGINNING OF CLASS]

[SECOND GROUP PRESENTATION ON MONDAY, MARCH 30]

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 WEEK 13: COURSE WRAP UP

[GROUP PAPER DUE ON WEDNESDAY, APRIL 8 – BEGINNING OF CLASS]

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