040140 KU Competition and Regulation: Theory (MA) (2021W)

Course Summary: After the required Microeconomics and Game Theory classes, students should be familiar with the functioning and properties of perfectly competitive markets, where market participants act as price takers, as well as with the basic models of imperfect competition (monopoly, Cournot and Bertrand oligopoly, Stackelberg model) and the notions of Nash equilibrium and subgame perfection. The present course, focusing on markets with imperfect competition, takes a theoretic approach and serves as a complement to the core Microeconomics classes. Most real world markets are have a few larger firms operating and therefore are characterized by of imperfect competition. In markets with imperfect competition, market participants are aware of the influence of their decisions on market prices and act strategically, taking optimal advantage of their information about the market and their competitors. The resulting market equilibrium heavily depends on the prevailing market structure -- the number of competitors, the cost structure, the choice of strategic decision variables (output, quality, location and/or price), the order of moves (sequential vs. simultaneous), product characteristics (like number of competing products and degree of product substitutability). Moreover, firms can influence market structure through advertising, product positioning, as well as through their investment on technology improvements and also by merging with or acquiring other firms. Consumers sometimes play an active role as well, for example when deciding how much information to acquire about firms’ offerings.

The course will consists of several parts. After reviewing the main microeconomic concepts used in the course and spending some time on discussing how to delineate the market, the first part of the course will be devoted to monopoly, with a single firm serving the market. Leaving the basic monopoly model behind us, we will mainly inquire into different forms of price discrimination and how these affect welfare. We also delve into the issue how the durability of the product constrains the monopoly power of the firm. From there we will move to markets where strategic interaction and/or informational asymmetries between firms plays an important role. This large topic will be divided into several parts. First, we will discuss the Bertrand paradox and different ways to get around that paradox. Here, we will turn to the role of product differentiation, capacity constraints, and consumer search (imperfect information on the part of consumers). Second, we will deal with strategic forms of entry deterrence. Here, we will turn to building up capacity in order to be a more aggressive competitor and also the limit pricing model. To discuss this model properly we have to deal also somewhat extensively with the notion of perfect Bayesian equilibrium. Third, we will deal with cartel formation and explicit and tacit collusion. Finally in the last part of the course we will look at research and development, network externalities, and other miscellaneous topics (if time permits).

Format: The topics of the course will be presented by the lecturer. Problem sets will be distributed regularly through the course website. Some sessions will be devoted to the discussion of problems. Students are expected to read the material in advance so that there can be active interaction during the lectures. When problems are discussed, students are expected to have worked on the problem sets in advance. Students are expected to do the recommended readings to complement classroom discussion of the topics.

Target group: Master Students in Economics
Prerequisites: Microeconomics I (Mikroökonomie I) and Game Theory I (Spieltheorie) I).