Prof. Bryan Caplan

Econ 370


Industrial Organization Syllabus


Course Focus:


"Industrial organization" is the branch of economics that studies the production and sale of economic goods.While many IO classes focus almost entirely on the economic analysis of antitrust law, this class will cover a much broader range of topics.We will not use much mathematics in the course, but you will need a firm grounding in microeconomic theory to keep up.


The course is divided into three main parts.The first part covers "Competition and Monopoly."The second, "The Economics of Special Markets," deals with the economics of markets that are unusual in interesting ways.The final section, "Markets, Regulation, Socialism, and Privatization," compares and contrasts real markets to real regulation to real government ownership as alternative systems for the production of economic goods.




We will not use much mathematics in the course, but you will need a firm grounding in microeconomic theory to keep up.If you did reasonably well in intermediate micro, you should be well-prepared.




There was no one text on the market that covered everything I wanted to cover, so we will be using a reader (available in the basement of Barnes and Noble in the Johnson Center), and parts of three books:


        Stephen Landsburg, The Armchair Economist


        David Friedman, Hidden Order


        W. Michael Cox and Richard Alm, Myths of Rich and Poor


We will not have much time to discuss these readings in class, but questions based on the readings will be on the exams.


Readings that I did not have time to include in your reader are marked with a *.I will hand them out in class.


Grading and Exams:


There will be one midterm and a final exam.The midterm counts 30% each; the final exam is 45%; homework counts for the remaining 25%.These weights are fixed - improvement on later exams will not retroactively raise your grades on earlier exams.


There is no formal grade for participation, but if you are one of the students who (in my judgment) contributes most to the quality of class discussion your grade will be increased by one-third of a grade (e.g. B- to B, B+ to A-).




There will be five homework assignments during the semester.Depending upon how good a job you do, your homework will receive a check-plus (4 points), a check (3 points), or a check-minus (2 points) if you turn it in; otherwise you receive 0 points.Late homework loses one point.Late homework is no longer accepted after I pass out my suggested answers for a given assignment.


Office Hours


The best way to contact me is by email at questions and requests can be satisfied by going to my homepage at office is in 8 Carow Hall; my office number is 3-2324.My official office hours are MTh 1:30-3:00, but you can also schedule an appointment or just drop by and see if Iím available.


Tentative Schedule:


My proposed schedule for the semester follows.If it proves too ambitious, I will try to simply say less about each topic rather than cut the topics for the final weeks.




PART I: Competition and Monopoly


Week 1: Varieties and Benefits of Competition

        Perfect competition

        Imperfect ("Bertrand") competition

        contestable monopoly

        cost curves

        allocative and productive efficiency



Steven Landsburg, The Armchair Economist, pp.60-72 ("Why Taxes are Bad").


Week 2: Government as a Cause of Monopoly

        government-imposed ("exogenous") monopolies and cartels

        varieties of

        efficiency of

        political competition



David Friedman, The Machinery of Freedom, chapter 7: "Monopoly II: State Monopoly for Fun and Profit"

Murray Rothbard, Power and Market, pp.40-55.

Arthur Schlesinger, The Coming of the New Deal, pp.62-67; 116-128.


Week 3: Market Monopoly?

        market ("endogenous") monopolies

        collusion - and why it's difficult

        predation - and why it's difficult

        (non-legal) barriers to entry

        natural monopolies

        the concentration-profits relation



Robert Bork, The Antitrust Paradox, pp.310-311.

David Friedman, The Machinery of Freedom, chapter 6: "Monopoly I: How to Lose Your Shirt"


Week 4: Antitrust

        antitrust law

        antitrust violations

        antitrust enforcement, private and government

        price discrimination

        antitrust and market monopoly



Steven Landsburg, The Armchair Economist, pp.157-167.


PART II: Special Markets


Week 5: Markets with Externalities

        Negative externalities (aka "public bads")

        Ex: Pollution

        Positive externalities (aka "public goods")

        Ex: Defense

        Bad but popular examples

        Good but unpopular examples

        Externalities, efficiency, and fairness

        Coase, property rights, and externalities

        Application: Regulation versus tradeable permits



David Friedman, Hidden Order, pp.260-78.


Week 6: Markets for Research and Development

        dynamic efficiency

        how productive efficiency increases

        innovation and externalities

        patents, innovation, and non-patentable innovation

        coordination games and path-dependence



Cox and Alm, chapters 6 and 8

Richard Posner, Economic Analysis of Law, pp.37-45

F.M. Scherer, Industrial Market Structure and Economic Performance, pp.621-630.

* Steven Landsburg, Fair Play, pp.143-160.




Week 8: Markets for Variety and Quality

        differentiated competition

        quality competition

        black markets and prohibition

        crime and externalities

        economics of organized crime



Cox and Alm, chapter 2

Robert Bork, The Antitrust Paradox, pp.312-314.


Week 9: Markets for Information

        search theory


        insurance and moral hazard

        adverse selection

        advantageous selection



Robert Bork, The Antitrust Paradox, pp.314-320.

David Friedman, Hidden Order, pp.275-277.


Week 10: Signaling


        warrantee example

        education example

        externalities and signaling

        why subsidize signaling?





PART III: Markets, Regulation, Socialism, and Privatization


Week 11: Making Fair Comparisons

        fallacies of comparison

        fair comparisons: real markets vs. real regulation vs. real government ownership; ideal markets vs. ideal regulation vs. ideal government ownership

        comparing ideal systems: problems of ability and knowledge

        comparing real systems: additional problem of incentives



Ludwig von Mises, Socialism, pp.483-488.



Week 12: Problems with Regulation

        ideal vs. real regulation

        ability and knowledge problems with regulation

        incentive problems with regulation

        public choice theory

        regulatory capture

        regulation as a cure and cause of externalities



David Friedman, Hidden Order, pp.289-297.


Week 13: Problems with Government Ownership

        ideal vs. real government ownership

        ability and knowledge problems with government ownership

        incentive problems with government ownership

        central planning and socialism

        government ownership as a cure and cause of externalities

        tragedy of the commons



Murray Rothbard, For a New Liberty, chapter 10: "The Public Sector, I: Government in Business"

Robert Conquest, The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine, chapter 16: "The Death Roll"


Week 14: Freeing Markets

        rebirth of the ideal of laissez-faire


        weak privatization - sub-contracting

        strong privatization - turning industry over to the market



Ludwig von Mises, Human Action, pp.730-732.

Milton Friedman, Free to Choose, pp.148-160.

Alfred Kahn, "Airline Deregulation"

Madsen Pirie, "Privatization"

Peter Murrell, "How Far Has the Transition Progressed?" pp.25-30.


Week 15: Radical Privatization

        pushing the limits of privatization

        case for free-market defense and judicial services



Murray Rothbard, Power and Market, chapter 1: "Defense Services on the Free Market"