Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

Part Two

Monopoly Power in Theory and Practice

In Part Two, we consider the pure monopoly case in much more detail than the simple, textbook case presented in Chapter 2. In particular, we consider a single firm facing a downward-sloping demand curve and the price and non-price tactics that it may use. While focusing on a single firm omits much strategic interaction, there are some cases in which this is realistic. In many regions, for example, there is just one ski lift operator within a radius of fifty miles and only one amusement park serving an even greater area. Second, and more importantly, the tactics discussed such as quantity discounts and bundling are also available in a setting of multiple rivals. However, it is much easier to understand the role of such measures in this more competitive environment after seeing them used by a single firm with no strategically-linked rival.

Chapter 5 begins with an examination of linear price discrimination tactics, such as market segmentation. It also includes an analysis of the 2003 study of price discrimination in new car sales by Scott-Morton, Zettelmeyer, and Silva-Risso. This is followed by a discussion of nonlinear price discrimination techniques, e.g., two-part tariffs, in Chapter 6. That chapter also includes a discussion of the evidence on airline price discrimination presented by Stavins (2001).

In Chapter 7, we explore the choice of product quality. This allows us to introduce the two concepts of horizontal differentiation, ...