Econ 8601-Industrial Organization

Dept. of Economics

University of Minnesota

Fall 2006


Thomas Holmes

945 Heller Hall

Office hours: Thursday 8:30-10:00, 4:30-5:30


Course home page:

Description: Econ 8601 is the first of the three-course field sequence in industrial organization.  The course requirements include a final exam and several homework sets. 

Background Text:  A useful undergraduate textbook is available free on the web.  The book is Church, Jeffrey and Roger Wage, Industrial Organization: A Strategic Approach, First Edition, Link

Lecture and Reading Schedule

Sept. 5: Introduction  (Lecture Slides)

The Cost of Monopoly, Dixit-Stiglitz model, Salop Model, Mankiw and Whinston.



C. d'Aspremont; J. Jaskold Gabszewicz; J.-F. Thisse, “On Hotelling's "Stability in Competition,” Econometrica, Vol. 47, No. 5. (Sep., 1979), pp. 1145-1150. Link

Holmes, T. “Course notes on a general equilibrium model of monopoly” Link

Chang-Tai Hsieh & Enrico Moretti , “Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry,” Journal of Political Economy, 2003.

N. Gregory Mankiw; Michael D. Whinston, “Free Entry and Social Inefficiency,” The RAND Journal of Economics, Vol. 17, No. 1. (Spring, 1986), pp. 48-58. Link

Posner, Richard A., Antitrust Law: An Economic Perspective. University of Chicago Press, 1978.

Tirole, Ch 7.

Salop Steven C., “Monopolistic Competition with Outside Goods,” The Bell Journal of Economics, Vol. 10, No. 1. (Spring, 1979), pp. 141-156. Link

Berry, Steven T & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, RAND, vol. 30(3), pages 397-420, Autumn


Sept 7: Dynamic Duopoly (Lecture Slides)

Static Cournot model, dynamic monopoly and duopoly models, Markov-perfect Equilibrium

Judd, Kenneth L., Numerical Methods in Economics MIT Press: Cambridge, 1998.

Gowrisankaran G. and T. Holmes, “Mergers and the Evolution of Industry Concentration: Results from the Dominant Firm Model,” Rand, Autumn, 2004. Link



Sept 12-14:  Stochastic Dynamic Models (Lecture Slides: POB,  Doraszelski_Judd Benkard)

Pakes, Ariel Michael Ostrovsky and Steve Berry, “Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Samples)” June 2005 Link

Doraszelski, Ulrich and Kenneth Judd, “Avoiding the Curse of Dimensionality in Dynamic Stochastic Games,” Harvard University, 2006. Link

Benkard, C. Lanier, “A Dynamic Analysis of the Market for Wide-bodied Commercial Aircraft",  The Review of Economic Studies, Volume 71, Number 3, July 2004, pp. 581-611(31). Link



Pakes, Ariel  and Paul McGuire, “Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model, The RAND Journal of Economics  Vol. 25, No. 4 (Winter, 1994), pp. 555-589 Link

Doraszelski, Ulrich and Ariel Pakes, “A Framework for Applied Dynamic Analysis in IO,", Harvard University, 2006, forthcoming in Mark Armstrong and Robert Porter (eds.), Handbook of Industrial Organization, Volume 3, North-Holland, Amsterdam Link



Sept 19 Innovation

Boldrin, Michele and David Levine, “Growth and Intellectual Property,”  UCLA manuscript. 2006 Link

Boldrin, Michele and David Levine, “Perfectly Competitive Innovation,” UCLA manuscript 2005 Link

Horner, Johannes,  “A Perpetual Race to Stay Ahead," The Review of Economic Studies, Review of Economic Studies, Volume 71 Page 1027  - December 2004.




Anderson, Axel and Luis Cabral, “Go for Broke or Play it Safe? Dynamic Competition with Choice of Variance forthcoming in Rand Journal of Economics.  Link

Judd, Ken "Closed-Loop Equilibrium in a Multi-Stage Innovation Race," Economic Theory, 21 (2003), 673-695. Working paper version was Northwestern Center for Mathematical Studies in Economics and Management Sciences Working Paper 647 (February 1985). Working paper version: (postscript) (pdf)



September 26, Size Distribution of Firms


Hopenhayn, Hugo, “Entry, Exit, and firm Dynamics in Long Run Equilibrium,” Econometrica  Vol. 60, No. 5 (Sep., 1992), pp. 1127-1150 Link  Notes on Hopenhayn

Klette and Kortum, “Innovating Firms and Aggregate Innovation,” Journal of Political Economy, 2004,  968-1018. 



Holmes, Thomas and Matthew Mitchell, “A Theory of Factor Allocation and Plant Size," June 2005 working paper, Link

Notes on Size Distribution in Dixit-Stiglitz Model

Lucas, Robert “On the Size Distribution of Business Firms,” Bell Journal, 1978, 508-523


September 28, More on the Size Distribution

Luttmer, Erzo, “Growth and the Size Distribution of Firms,” forthcoming QJE, 2006. Link



Xavier Gabaix, “Zipf's Law for Cities: An Explanation,” The Quarterly Journal of Economics  Vol. 114, No. 3 (Aug., 1999), pp. 739-767 Link

Eeckhout, Jan, “"Gibrat's Law for (all) Cities", American Economic Review 94(5), 2004, 1429-1451. Link

Lentz and Mortensen, “Productivity Growth and Worker Reallocation,” International Economic Review, 2005: 731-749

Jones, Charles, “The Shape of Production Functions and the Direction of Technical Change,” Quarterly Journal of Economics, May 2005, Vol. 120 (2), pp. 517-549. Link


Oct 3:

Theory of  the Firm (Notes)

Gibbons, Robert, “Incentives Between Firms (and Within), Management Science, Volume 51, Number.1 (2005): 2-17. Link

Holmes, “A Williamson Hold-up Model” class notes.


Gibbons, Robert, “Four Formal(izable) Theories of the Firm?,” Manuscript in progress, September 2004 Link

Holmstrom, B.R. and P. Milgrom, "The Firm as an Incentive Device," American Economic Review, Sept. 1994. Link



Oct 5


Theory of the Firm Continued

Ricardo Alonso, Wouter Dessein, and Niko Matouschek “When Does Coordination Require Centralization?” July 2006, University of Chicago working paper.  Link


Facts and Theories about Employees and Plants Notes1 Notes2

Background References

J. Abowd, F. Kramarz (2001), “Inter-Industry and Size Wage Differences,” Cornell University Working Paper, Link



Davis, Steve J. and John Haltiwanger, “Wage Dispersion between and within U.S. Manufacturing Plants 1963-86,” Brookings Papers: Microeconomics 1991, 115-200. Link

Oi, Walter Y. and Todd L. Idson, “Firm Size and Wages,” Handbook of Labor Economics, Ch 33, vol. 3B, 1999.

Katz and Summers, Industry Rents: Evidence and Implications, Brookings Papers on Economic Activity v0, n0 (Special Issue, 1989): 209-75 Link

Krueger, Alan B. and Lawrence H. Summers, “Efficiency Wages and the Inter-Industry Wage Structure,” Econometrica, Vol. 56, No. 2. (Mar., 1988), pp. 259-293. Link

Lewis, H. Gregg, "Union Relative Wage Effects," in Orley Ashenfelter and Richard Layard, eds., Handbook of Labor Economics, North-Holland, 1986.



Vertical Integration

Garicano, Luis, and Thomas Hubbard, “Specialization, Firms and Markets: the Division of Labor within and between Law Firms,” University of Chicago working paper, August 2005. Link

Holmes, Thomas J. “"Localization of Industry and Vertical Disintegration," Review of Economics and Statistics, Vol. 81, No. 2, May 1999, 314-25. Link  (Working paper version with model.  Link)

Acemoglu, Daron Antràs, Pol, and Elhanan Helpman, “Contracts and the Division of Labor," May 2005 Link

Antràs, Pol and Elhanan Helpman, “Global Outsouring,”  Journal of Political Economy, 2004, vol. 112, no. 3 Link


October 12: Outsourcing (class overheads)

Luis Garicano and Esteban Rossi-Hansberg, “Organization and Inequality in a Knowledge Economy,”Forthcoming in the Quarterly Journal of Economics, November 2006  Link

Pol Antràs, Luis Garicano and Esteban Rossi-Hansberg, “Organizing Offshoring: Middle Managers and Communication Costs, Princeton working paper, April 2006.  Link



October 17/19: Location Of Industry: The Case of Wal-Mart (class overheads, more overheads)

Holmes, Thomas, “The Diffusion of Wal-Mart and Economies of Density”, manuscript

Jia, Panle, “What Happens When Wal-Mart Comes to Town: An. Empirical Analysis of the Discount Retailing Industry”


October 24: The Location of Industry

Eaton and Kortum, “Technology, Geography, and Trade, Econometrica, 70(5), 2002, 1741-1779.  Link



Ottaviano G., Tabuchi T., and Thisse J-F, “Agglomeration and Trade Revisited” International Economic Review    May 2002, vol. 43, no. 2,   pp. 409-436(28) Link

Holmes, Thomas, “The Location of Sales Offices and the Attraction of Cities,” Journal of Political Economy Vol 113, (2005) Link

Helpman, Elhana, Marc Melitz, and Stephen Yeaple, “Exports vs. FDI with Heterogeneous Firms” American Economic Review, March 2004, Link

Holmes, T and J. Stevens, “Spatial Distribution of Activities in North America,” Handbook of Urban and Regional Economics Link

Plants and Productivity in International Trade

Andrew B. Bernard; Jonathan Eaton; J. Bradford Jensen; Samuel Kortum The American Economic Review, Vol. 93, No. 4. (Nov., 2003), pp. 1268-1290. Link

Alvarez and Lucas, “General  Equilibrium  Analysis  of  the Eaton-Kortum  Model  of International  Trade,” March 2006 working paper, Link