【正文】 sume firm knows demand and its costs ? ? Possible choice variables include: price, ? quantity, advertising, quality, product ? characteristics, terms of sale (rent or sell) Chapter 1: Introduction ? Demand Side ? All of the models we will study depend ? critically on demand ? – Market demand if no price discrimination ? – Individual demand or market segment ? demand if price discrimination ? ? “Suppose demand is P = 100 – 2Q” ? – How to find demand parameters: 100 and 2? ? – Answer: Data collection and econometrics Chapter 1: Introduction ? Two Branches of IO ? Theoretical IO: Derive predictions using ? microeconomic theory and a set of ? plausible assumptions ? – Focuses on mathematical derivations ? ? Empirical IO: Use data to estimate the ? parameters of a theoretical model ? – Focuses on proper data collection and ? econometric techniques Chapter 1: Introduction ? Theoretical IO: Simple Example ? Suppose a market is perfectly petitive ? – Market demand: P = a – bQ ? – Market supply: P = c + dQ ? ? Find intersection of supply and demand: ? Q* = (a – c) / (b + d) ? ? Comparative statics analysis: Comparison ? of two different equilibrium states, before ? and after a change Chapter 1: Introduction ? Empirical IO ? ? Reduced form analysis: Find empirical ? relationship between economic variables ? – Estimated equation cannot be interpreted as a ? causal relationship: shows only correlations ? not causation ? ? Structural model: A model derived from ? economic theory ? – Estimated equation can be interpreted as a ? causal relationship Chapter 1: Introduction ? Empirical IO: Simple Example ? ? Write down a structural model and ? estimate demand and supply parameters: ? P = a – bQ + ε ? P = c + dQ + ε ? ? We will see in Lectures 4 and 5 this is not ? as simple as running a regression ? – Will learn some econometric techniques to ? obtain unbiased parameter estimates Chapter 1: Introduction ? Role of Theory and Empirics ? ? Theoretical IO important ? – Provides a foundation for empirical work ? – Useful theoretical results even without data ? ? Ex: Predict that a monopolist would choose to rent rather than sell a durable good to maximize profits ? ? Empirical IO important ? – Quantify effects predicted by theory ? ? Ex: Determine that prices would increase 4% with ? a merger of two petitors Chapter 1: Introduction Chapter 1: Introduction Chapter 1: Introduction ? SCP: Empirical Work ? ? Find general empirical relationships ? between structure and performance ? ? Relies on accounting data on profits and ? costs to measure market power ? – Crosssectional data for different industries ? – Run regressions: ? ? Dependent variable measures industry profitability ? (market performance) and independent variable ? measures concentration (market structure) Chapter 1: Introduction ? New Industrial Organization ? ? Focuses on specific industries ? – Analyze each industry individually ? ? Models strategic behavior by firms using ? microeconomic theory (aka price theory) ? ? Identifies exogenous factors: primitives ? – Exogenous: Not affected by firms? behavior ? ? Determined by things outside the model ? – Endogenous: Affected by firms? behavior Chapter 1: Introduction Chapter 1: Introduction ? New Empirical IO ? ? Regressions and other econometric ? analyses have foundation in micro theory ? – Structural models ? ? Not reduced form analysis like empirical SCP ? – Timeseries data or crosssectional data over ? different geographic areas ? – Accounting data on costs are not used ? ? Costs and markup are output of empirical model ? rather than input Chapter 2: Perfect Competition ? Chapter 2 ? Costs, Entry Barriers and Perfect Competition Chapter 2: Perfect Competition ? Costs Are Important ? ? Cost assumptions can drive model ? predictions ? ? Costs key in antitrust enforcement ? ? NEIO: costs often treated as “primitives” ? – Input prices instruments for price in empirical ? applications: exogenous shifter of supply ? – Cost estimates an output rather than an input, ? but still need assumptions about costs Chapter 2: Perfect Competition ? Average Costs ? ? Average Variable Costs (AVC): VC / Q ? – What happens to AVC as output increases? ? ? Average Fixed Costs (AFC): FC / Q ? – What happens to AFC as output increases? ? ? Average Costs (Average Total Costs) ? (AC): TC / Q ? – What happens to AC as output increases? ? ? TC = AC * Q Chapter 2: Perfect Competition ? Marginal Costs ? ? Marginal Costs (MC): The incremental ? costs associated with an incremental ? increase in output ? – Often denoted “mc” or “c” ? – Functional form assumption on MC important ? ? FC always a constant ? ? Shape of cost curves driven by shape of MC curve ? ? Common simplifying assumption: Constant ? marginal costs Chapter 2: Perfect Competition ? UShaped Cost Curves Chapter 2: Perfect Competition ? Constant Marginal Costs Chapter 2: Perfect Competition ? Decreasing Marginal Costs Chapter 2: Perfect Competition ? Economies of Scale ? ? Economies of scale: Average cost falls as ? output increases ? – Also called increasing returns to scale (IRTS) ? – Some reasons for positive economies: ? ? Fixed costs ? ? Specialization of inputs ? ? Law of large numbers amp。 D is not relevant in this industry ? ? No externalities Chapter 2: Perfect Competition ? Profit Maximization Chapter 2: Perfect Competition ? One Firm in Competitive Market Chapter 3: Monopoly and Dominant firm ? Chapter 3 ? Monopoly and Dominant Firms Chapter 3: Monopoly and Dominant firm ? Monopoly ? ? Monopoly: Single firm produces a product ? that has no clo