Industrial Organization

Description of the Course
This course is cataloged within the field of Advanced Microeconomics, so it requires the knowledge of the language and instruments used in basic and intermediate Microeconomics courses. In this dynamic, this course aims to answer different questions about the nature of signatures and their interactions. Among them, the following stand out: how are industries organized? What effects does this produce in the allocation of resources in the markets and in the welfare of society (consumers, firm)? How can higher balance be achieved through the action of a regulatory authority?

It is necessary to specify that the analysis of the firm will be of an "integrated form" together with the theory of the industry. That is, although the main focus of analysis will be industry theory, relevant facts of the firm's theory will be introduced and discussed throughout the course.

From another point of view, this course helps to understand the functioning of real economies and how theory can explain these phenomena. Therefore, a main distinction with the rest of the microeconomics courses that the students have studied, is that this course is based on reality, so the understanding of agent interactions is very close because you are a consumer yourself and you satisfy your needs by participating in the market. You only need to read the newspaper or simply go shopping to observe the behaviors, actions or performance of the companies.

This course is organized, in general terms, in the following topics which are discussed theoretically upon presentation of specific cases from day to day.

• What is the industrial organization?
• Market concentration, market power, relevant market and level of competition in the industries.
• Simple monopoly, multi-product monopoly and price discrimination.
• Theories of oligopolies (price and production strategies).
• Introduction to the theory of games.
• Collusion theories and facilitating practices.
• Theory of the firm
• Vertical integration and restrictions.
• Theory of information imperfections.
• Network economics (if there is enough time to develop it).

Relevance of the course for student training
This course is relevant for the students since relevant competences can be developed to make a leap between the theoretical courses and the empirical evidence, in the correct way, to complement both and understand the nature of the interactions of the agents that make markets come to life. In other words, in this course we will study how to use the tools of the economy both from the perspective of the firms, as well as to present the student in the analysis of industrial organization and regulation issues. Specifically, the behavior of companies is studied in an intermediate context between the paradigm of perfect competition and the monopoly with a uniform price. Likewise, the theory of economic regulation is studied, it is explained how it relates to the choice of the regulatory mechanism with the information that the regulator has and with the objectives that it has.

General objectives
The main goal of the course is to provide the necessary tools for the student to understand the functioning of imperfect markets and the regulatory logic, as well as the applications of these concepts to the Chilean economy. The fundamental questions that we try to answer are the following: how do markets behave in practice where the assumptions of perfect competition are not met and what consequences does this behavior have on efficiency? What factors determine the organizational structure and optimal size of a company? What is the role of competition and regulatory policies in a market economy?

Specific objectives
The course has the following specific objectives:
1) Present the fundamental notions of imperfect competition theory.
2) Understand the economic fundamentals of price discrimination and its applications in the field of business.
3) Understand the objectives of the regulatory policy, its institutionality and analyze the effects of that policy on real events.
4) Apply the theory of industrial organization to strategic business decisions.

Contents
Review of key concepts of microeconomics

• What is the economy? What is microeconomics?
• Offer curve
• Demand curve
• Demand elasticity
• Assumptions of a perfectly competitive market
• Market balance (surplus)
• Displacement of supply and / or demand curves

Introduction to Industrial Organization and Concentration Indices

• Challenge perfectly competitive market assumptions
• Definition of Industrial Organization
• Concentration curves
• Reason for concentration
• HHI
• Relevant market and cross elasticity
• Market power
• Lerner Index

Monopolies

• Definition and examples
• Optimization problem of a monopolist
• Sensitivity of the optimization point of a monopolist
• Comparison with competitive market and deadweight loss
• Relation with Lerner index

Monopolies II and Natural Monopolies

• Why are there monopolies? - Types of entry barriers
• Review of cost structures of firms (fixed, media, variable media, etc.)
• Definition of natural monopoly
• Examples
• Why is it optimal that there is only one firm?
• Regulation options and consequences (not regular, impose competitive equilibrium, or set equal prices at average costs)

Price discrimination

• Why?
• Definition of the concept of arbitrage and factors that prevent it
• First degree discrimination
• Second degree discrimination
• Third degree discrimination

Theory of Games and Strategy

• Definition of a game
• Elements of a game
• Types of games
• Graphic ways to represent a game
• Ways to solve a game
  • Dominated strategies
  • Dominant strategies
  • Nash equilibrium
  • Best answer

Models of imperfect competition

• Cournot model (quantity competition)
• Bertrand model (price competition)
• Stackelberg model (leader-follower)
• Edgeworth model (capacity restrictions)

Product differentiation

• Definition
• Horizontal and vertical differentiation
• Hotelling model
• Salop model

Collusion

• Definition
• Stability of collusion agreements
• Factors that facilitate collusion
• Price wars

Horizontal mergers

• Incentives to the merger
• Effects of a merger on firms, competitors, and consumers
• Factors that facilitate collusion
• M & A regulation policies

Vertical integration

• Definition of vertical relationships between firms
• Resolution of vertical relations problems by backward induction
• Concept of double marginalization
• Effects for firms and consumers

Bibliography

• Cabral, L. M. (2000). Introduction to industrial organization. MIT press.
• Pepall, L., Richards, D., Norman, G. (2006). Organización Industrial: Teoría y Práctica Contemporáneas, 3era edición. Thomson Editores.
• Pindyck, R. S., & Rubinfeld, D. L. (2002). Microeconomia.

Methodology
The work methodology of the course combines two elements. First, the formal-theoretical analysis of various economic models (mathematical and graphical tools) that studies the strategies that companies follow to maximize their usefulness in a non-competitive environment. This analysis will be complemented with practical applications or empirical evidence to understand how the theoretical allows to understand these facts.

In short, throughout the semester we will try to answer a series of questions such as: What are the consequences of a monopoly and why are we worried about its existence? Is it the supermarket market (or the pharmacies market?) uncompetitive due to the fact that they are dominated by a few actors? Why do cell phone companies sell different pricing plans and what is the reason behind the design of such plans? How do airlines determine their prices? What are the advantages and disadvantages of outsourcing production processes? Why is the use of franchises so frequent in the case of fast food chains? How are the prices of water and electricity determined? What effects does the collusion of large chains have on consumers and small pharmacies?

The course requires that the student masters the instruments learned in Microeconomics. Likewise, a knowledge of basic calculation tools (simple derivatives) is required. Those who consider themselves with a weak base in this area, are recommended a quick reading of the Nicholson, "Microeconomic Theory" (more advanced edition is recommended) in order to quickly adjust to the demands of the course

Evaluations
Course evaluations will consist of two tests, a presentation about a research paper, a grade for attendance, and a final exam. A small group of students can be exempted from the final exam (best 10%, approximately) based on the rules of the Faculty of Engineering and Sciences of the UAI. The percentage of each grade will be the following:

First Official Test - 25%
Second Official Test - 25%
Presentation - 15%
Attendance - 5%
Final Exam - 30%

Regulation:
Approval requirements
The approval of the course requires:
1. Achieve a weighted average of tests, attendance, presentation, and exam above 3.95.
2. Obtain a grade higher than or equal to a 3.0 on the test.

Assistance to chairs
Class attendance is mandatory. The teacher will give a 5% weight to the assistance in the final grade. The note is linear in attendance (i.e., to obtain a 7.0 you need 100% attendance). It is important to mention that signing in the attendance list during class is the student's obligation. Once the class is finished, the list cannot be modified, without exceptions. Unlike the tests and the exam, class absences are not justifiable.

Re-correction
In both tests and in the exam the students will be given two tenths of a base for giving them (i.e., if they do not take the test or exam or if they give it completely in blank they do not get these tenths). The procedure for re-correcting a test or examination will be as follows:

1. After the publication of grades and the corresponding evaluation guideline, the assistant will deliver the tests or exams to all the students during an assistantship that will be notified at least one week in advance. This is the only instance in which the evaluation can be reviewed and a re-correction can be requested.
2. Evaluations with graphite pencil answers are not entitled to re-correction.
3. The student interested in requesting a re-correction must complete a standard form available in Webcursos, where he / she can make a written request that will be given to the assistant during the same assistantship in question. The request should detail the question to be corrected and provide solid arguments as to why it is believed that the assigned score is not correct.
4. Those who request a re-correction renounce the two tenths that were given for submitting the test or exam.
5. The assistant will provide a response to each student's request, which may be positive or negative.
6. If the student is not satisfied with the answer of the corrective assistant, he can ask the teacher to consider the case. For this, the corrective assistant will deliver the form with written arguments from the student to the teacher (the completed form is given during the assistantship, there is no other instance to modify the arguments presented in the original form).
7. The professor will check the evaluation in its entirety, including not only the question (s) in which he requested re-correction. Consequently, it is possible that it improves the evaluation of some questions and that it lowers that of others, so that the result of this process can also be a drop in the final grade of the test or exam in question.

Absence to more than one test or exam
There is no type of written test or written examination. However, there are two opportunities in which an oral questioning will be held with the professors of industrial organization of all the sections in a room at a commonly agreed time to replace a grade. These cases are the following:

1. In case of non-attendance to two tests with accepted medical justification and with a percentage of attendance to chairs greater than or equal to 50%. In this case, the mark got from questions examination will replace the grade of a test. The grade of the other test will be replaced by the exam grade, as described above.
2. In case of non-attendance to the exam and with a percentage of attendance to chairs greater than or equal to 50%. In this case, the interrogation replaces the exam grade. In case of having less than 50% attendance at a chair in any of the two previous cases, the student fails the subject.

Ethics and Administrative Measures

For the purpose of regulating the behavior during the semester, the Honor Code (http://www.uai.cl/images/seciones/universidad/Codigo_de_Honor.pdf) is applied, which is understood to be known by the students and the teaching body.

For purposes of any request or sending of information, they should be sent to Elizabeth Rojas (elizabeth.rojas@uai.cl), which will be evaluated by the Teaching Council, sending its resolution to the student and professor.