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Competitive Analysis Rosa M. Abrantes-Metz, Ph.D. ________________________________________________________________________ Competitive Analysis (C70.0015.01) Course syllabus Spring Semester 2009 Mondays and Wednesdays from 9.30 to 10.45 Office Hours: Mondays from 10.45 to 11.30 • Course description. This course takes a formal approach to the study of Industrial Organization: it analyzes the way firms make production and sales decisions and interact strategically with each other in the marketplace. The course is divided into four parts. We start by studying optimal pricing policies, including versioning, bundling, and related market segmentation strategies in the first two parts of the course. We then apply game theory to the study of oligopoly interaction, focusing on pricing and output strategies in a dynamic setting. In the final part of the course, we analyze strategies for firm dominance, especially through the deterrence of potential competition. The list of such strategies includes capacity expansion, product proliferation, and exclusive dealing contracts. The main goal of the course is to develop the basic intuition for pricing and other forms of strategic behavior on the part of firms, both when faced with complex patterns of consumer demand and when faced with strategic competitors. Readings in the textbook will provide background and introduction to a variety of topics, many of which will be covered in class in greater depth. Lectures, problem sets and exams will focus on formal analysis. There will be a class project focused on cartels and mergers and acquisitions. Occasional supplemental readings will provide additional motivation and opportunities to develop intuition. • Sketch of topics. The topics developed in the course include: Introduction and overview; Basic pricing; Price discrimination by indicators and by self-selection; Static and dynamic oligopoly competition (tacit collusion and cartels); Strategic behavior, entry and exit: entry deterrence, predatory pricing, mergers. A more complete description can be found in the detailed course outline. • Major. Considering the relevance of competitive analysis for a variety of fields, the course is listed with an interdisciplinary course designator. Competitive Analysis counts towards a major in economics, marketing or management. • Prerequisites. Students are required to have taken a semester of microeconomics. Students are also expected to be comfortable with basic algebra and calculus, including systems of equations and derivatives. • Readings. The required text is Cabral, Luís, Introduction to Industrial Organization, MIT Press, 2000. • Exams, problem sets and class projects. There will be two tests, given in class, each covering approximately one half of the course material. There will also be four problem sets assigned throughout the semester. There will be a class project, in which half of the class will focus on cartels, and the other half on mergers or acquisitions, to be presented and discussed in the classroom. Please note that there are no make-up exams in this course. Students are responsible for checking the test dates to avoid any conflict with other commitments. During the tests, students are not allowed to consult class notes, books, or any other material. • Grading. Will be based on the two tests (35% each), as well as class participation (20%) and the class project (10%). Problem sets will be graded on a check/+/- basis. Questions about grading must be made in writing and no more than a week after the tests are returned. • Code of conduct. The NYU Stern Undergraduate Code of Conduct upholds the academic and professional mission of the College. The Code does not follow any specific legal doctrine, but rather adheres to a universal notion of character and personal responsibility. The Code supports a meritocratic environment where students can develop their academic skill and personal integrity. The Code's Honor System is a way of maintaining order and allowing for academic fairness. The Honor System is designed to encourage academic pursuits and personal development. The Code of Conduct and Honor System promote a rewarding undergraduate experience that instills strength and accountability in members of the undergraduate community. • Students with disabilities. If you have a qualified disability and will require academic accommodation during this course, please contact the Moses Center for Students with Disabilities (CSD, 998-4980) and provide me with a letter from them verifying your registration and outlining the accommodations they recommend. If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation. • Help. There are times when a little help can get you past an obstacle. If you are in that situation, please send me an email ([email protected]) or give me a call (office number: (212) 506-3981 and cell number: (917) 499-4944). Of course, you should also drop by my office hours when you feel the need, on Mondays right after class. Competitive Analysis Rosa M. Abrantes-Metz, Ph.D. ________________________________________________________________________ Competitive Analysis (C70.0015.01) Detailed course outline Part I. Demand and pricing 1. January 21 Introduction and overview. Readings: Cabral, Introduction to Industrial Organization, Ch. 1. 2. January 26 Basic pricing. Readings: lecture notes. 3. January 28 Price discrimination by indicators. Readings: Cabral 10, lecture notes. 4. February 2 Price discrimination by self-selection. Readings: Cabral 10, lecture notes. 5. February 4 Price discrimination: applications. Readings: Cabral 10, lecture notes. 6. February 9 Demand estimation: examples. Readings: Lecture notes. 7. February 11 Pricing in practice: examples. Mini-case: Monsanto's Roundup; Wednesdays at Cinemex. Due at the beginning of class: Problem set 1. 8. February 18 EBay’s online trading mechanism (guest speaker: Luís Cabral). 1 Part II. Static oligopoly analysis 9. February 23 Oligopoly price competition. Readings: Cabral 4, 7. 10. February 25 Oligopoly output competition. Readings: Cabral 7, lecture notes. 11. March 2 Oligopoly competition: applications. Readings: Cabral 7, lecture notes. 12. March 4 Oligopoly competition: applications. Readings: Cabral 7, lecture notes. 13. March 9 Review. Due at the beginning of class: Problem set 2. 14. March 11 First test. Part III. Dynamic oligopoly analysis 15. March 23 Repeated interaction and collusion. Readings: Cabral 8, lecture notes. 16. March 25 Price wars. Readings: Cabral 8, lecture notes. 17. March 30 Factors facilitating collusion. Readings: Cabral 8, lecture notes. 18. April 1 Cartels in practice: collusive markers and screens, and examples of major recent international cartels. Readings: Abrantes-Metz and Froeb’s article on screens used by competition authorities worldwide, and Abrantes-Metz et al’s paper on a variance screen for collusion. Connor’s paper on international cartels. Lecture notes. 2 Part IV. Entry and exit 19. April 6 Entry costs, market structure, and welfare. Readings: Cabral 14, lecture notes. 20. April 8 Strategic entry deterrence, I. Readings: Cabral 15, lecture notes. Due at the beginning of class: Problem set 3. 21. April 13 Strategic entry deterrence, II. Readings: Cabral 15, lecture notes. 22. April 15 Predatory pricing: Firm strategy and public policy. Readings: Cabral 15, lecture notes. 23. April 20 Mergers and acquisitions: Firm strategy and public policy. Mini-case: GE and Honeywell. Readings: Cabral 15, lecture notes. 24. April 22 Merger analysis in practice (guest speaker: Lawrence White). Readings: Dalkir and Warren-Boulton's paper on the Staples-Office Depot merger. 25. April 27 Class projects on cartels and mergers and acquisitions: presentations. 26. April 29 Review. Due at the beginning of class: Problem set 4. 27. May 4 Second test. 3