FIFTH EDITION
INDUSTRIAL
ORGANIZATION
COMPETITION, STRATEGY AND POLICY
JOHN LIPCZYNSKI
JOHN O. S. WILSON
JOHN GODDARD
05/05/2017 09:44
, Industrial
Organization
A01 Industrial Organization 21710.indd 1 22/05/2017 17:10
, At Pearson, we have a simple mission: to help people
make more of their lives through learning.
We combine innovative learning technology with trusted
content and educational expertise to provide engaging
and effective learning experiences that serve people
wherever and whenever they are learning.
From classroom to boardroom, our curriculum materials, digital
learning tools and testing programmes help to educate millions
of people worldwide – more than any other private enterprise.
Every day our work helps learning flourish, and
wherever learning flourishes, so do people.
To learn more, please visit us at www.pearson.com/uk
.. ..
A01 Industrial Organization 21710.indd 2 22/05/2017 17:10
, Industrial
Organization
Competition, Strategy and Policy
Fifth edition
John Lipczynski, John O.S. Wilson and John Goddard
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney
Dubai • Singapore • Hong Kong • Tokyo • Seoul • Taipei • New Delhi
Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan
..
A01 Industrial Organization 21710.indd 3 22/05/2017 17:10
, Pearson Education Limited
Edinburgh Gate
Harlow CM20 2JE
United Kingdom
Tel: +44 (0)1279 623623
Web: www.pearson.com/uk
First published 2001 (print)
Second edition published 2005 (print and electronic)
Third edition published 2009 (print and electronic)
Fourth edition published 2013 (print and electronic)
Fifth edition published 2017 (print and electronic)
© Pearson Education Limited 2001 (print)
© Pearson Education Limited 2005, 2009, 2013, 2017 (print and electronic)
The rights of John Lipczynski, John Wilson and John Goddard to be identified as authors of this work have been asserted by
them in accordance with the Copyright, Designs and Patents Act 1988.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system,
distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should
be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be
obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN.
The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed
or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the
terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised
distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible
may be liable in law accordingly.
Pearson Education is not responsible for the content of third-party internet sites.
The Financial Times. With a worldwide network of highly respected journalists, The Financial Times provides global business
news, insightful opinion and expert analysis of business, finance and politics. With over 500 journalists reporting from 50
countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent,
global perspective. To find out more, visit www.ft.com/pearsonoffer.
ISBN: 978-1-292-12171-0 (print)
978-1-292-12175-8 (PDF)
978-1-292-12176-5 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Lipczynski, John, author. | Wilson, John O. S., author. | Goddard,
John A., author.
Title: Industrial organization : competition, strategy and policy / John
Lipczynski, John O.S. Wilson and John Goddard.
Description: Fifth edition. | Harlow, England ; New York : Pearson, 2017
Identifiers: LCCN 2017002086| ISBN 9781292121710 (Print : alk. paper) | ISBN
9781292121758 (PDF) | ISBN 9781292121765 (ePub)
Subjects: LCSH: Industrial organization (Economic theory)
Classification: LCC HD2326 .L53 2017 | DDC 338.6--dc23
LC record available at https://lccn.loc.gov/2017002086
10 9 8 7 6 5 4 3 2 1
21 20 19 18 17
Print edition typeset in 10/12.5pt Times NR MT Std by 35
Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
A01 Industrial Organization 21710.indd 4 22/05/2017 17:10
, For Ollie, Benny and Jude JL
For Alison, Kat, Libby and Jean JW
For Sarah, Aimée, Thomas and Christine JG
A01 Industrial Organization 21710.indd 5 22/05/2017 17:10
,A01 Industrial Organization 21710.indd 6 22/05/2017 17:10
, Contents
Preface xxiv
Acknowledgements xxvii
Part I: Theoretical Foundations
1 Industrial organization: an introduction 3
1.1 Introduction 3
1.2 Static and dynamic views of competition 4
1.3 The structure–conduct–performance paradigm 6
1.4 Strategic management: a short diversion 27
Discussion questions 30
Further reading 31
2 Production, costs, demand and profit maximization 32
2.1 Introduction 33
2.2 Production and costs 33
2.3 Demand, revenue, elasticity and profit maximization 50
2.4 Summary 60
Discussion questions 61
Computational questions 62
Further reading 63
3 The neoclassical theory of the firm 64
3.1 Introduction 64
3.2 The neoclassical theory of the firm: historical development 65
3.3 Theories of perfect competition and monopoly 67
A01 Industrial Organization 21710.indd 7 22/05/2017 17:10
, viii | Contents
3.4 Efficiency and welfare properties of perfect competition
and monopoly 73
3.5 Theory of monopolistic competition 79
3.6 Summary 82
Discussion questions 83
Computational questions 83
4 Managerial and behavioural theories of the firm 85
4.1 Introduction 85
4.2 Critique of the neoclassical theory of the firm 86
4.3 Separation of ownership from control: managerial theories
of the firm 89
4.4 The behavioural theory of the firm 100
4.5 Summary 102
Discussion questions 103
Further reading 103
5 Transaction costs, agency and resource-based
theories of the firm 104
5.1 Introduction 104
5.2 The Coasian firm 105
5.3 Transaction costs and the theory of the firm 109
5.4 Agency theory 113
5.5 Property rights and the theory of the firm 116
5.6 The resource-based theory of the firm 117
5.7 Summary 120
Discussion questions 122
Further reading 122
6 Corporate governance 124
6.1 Introduction 124
6.2 Agency problems and the need for corporate governance 126
6.3 Instruments of corporate governance 129
6.4 Corporate governance codes of practice 133
6.5 Corporate governance: implementation and empirical evidence 136
6.6 Business ethics 142
6.7 Corporate social responsibility 148
6.8 Summary 157
Discussion questions 159
Further reading 159
A01 Industrial Organization 21710.indd 8 22/05/2017 17:10
, Contents | ix
Part II: Structural Analysis of Industry
7 Oligopoly: non-collusive models 163
7.1 Introduction 164
7.2 Interdependence, conjectural variation, independent
action and collusion 165
7.3 Models of output determination in duopoly 166
7.4 Models of price determination in duopoly 178
7.5 The kinked demand curve and models of price leadership 185
7.6 Summary 190
Discussion questions 192
Computational questions 192
Further reading 194
8 Oligopoly: collusive models 195
8.1 Introduction 195
8.2 Collusive action and collusive forms 196
8.3 Collusive institutions 200
8.4 Profit-maximizing models of price and output
determination for a cartel 203
8.5 Other motives for collusion 207
8.6 Factors conducive to cartel formation 210
8.7 Influences on cartel stability 215
8.8 Summary 225
Discussion questions 226
Further reading 226
9 Game theory 228
9.1 Introduction 229
9.2 Dominance and Nash equilibrium 230
9.3 The prisoner’s dilemma game 235
9.4 Mixed strategies 239
9.5 Sequential games 246
9.6 Repeated games 253
9.7 Summary 255
Discussion questions 256
Computational questions 257
Further reading 259
10 Concentration: measurement and trends 260
10.1 Introduction 260
10.2 Market and industry definition 261
A01 Industrial Organization 21710.indd 9 22/05/2017 17:10
INDUSTRIAL
ORGANIZATION
COMPETITION, STRATEGY AND POLICY
JOHN LIPCZYNSKI
JOHN O. S. WILSON
JOHN GODDARD
05/05/2017 09:44
, Industrial
Organization
A01 Industrial Organization 21710.indd 1 22/05/2017 17:10
, At Pearson, we have a simple mission: to help people
make more of their lives through learning.
We combine innovative learning technology with trusted
content and educational expertise to provide engaging
and effective learning experiences that serve people
wherever and whenever they are learning.
From classroom to boardroom, our curriculum materials, digital
learning tools and testing programmes help to educate millions
of people worldwide – more than any other private enterprise.
Every day our work helps learning flourish, and
wherever learning flourishes, so do people.
To learn more, please visit us at www.pearson.com/uk
.. ..
A01 Industrial Organization 21710.indd 2 22/05/2017 17:10
, Industrial
Organization
Competition, Strategy and Policy
Fifth edition
John Lipczynski, John O.S. Wilson and John Goddard
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney
Dubai • Singapore • Hong Kong • Tokyo • Seoul • Taipei • New Delhi
Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan
..
A01 Industrial Organization 21710.indd 3 22/05/2017 17:10
, Pearson Education Limited
Edinburgh Gate
Harlow CM20 2JE
United Kingdom
Tel: +44 (0)1279 623623
Web: www.pearson.com/uk
First published 2001 (print)
Second edition published 2005 (print and electronic)
Third edition published 2009 (print and electronic)
Fourth edition published 2013 (print and electronic)
Fifth edition published 2017 (print and electronic)
© Pearson Education Limited 2001 (print)
© Pearson Education Limited 2005, 2009, 2013, 2017 (print and electronic)
The rights of John Lipczynski, John Wilson and John Goddard to be identified as authors of this work have been asserted by
them in accordance with the Copyright, Designs and Patents Act 1988.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system,
distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should
be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be
obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN.
The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed
or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the
terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised
distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible
may be liable in law accordingly.
Pearson Education is not responsible for the content of third-party internet sites.
The Financial Times. With a worldwide network of highly respected journalists, The Financial Times provides global business
news, insightful opinion and expert analysis of business, finance and politics. With over 500 journalists reporting from 50
countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent,
global perspective. To find out more, visit www.ft.com/pearsonoffer.
ISBN: 978-1-292-12171-0 (print)
978-1-292-12175-8 (PDF)
978-1-292-12176-5 (ePub)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Lipczynski, John, author. | Wilson, John O. S., author. | Goddard,
John A., author.
Title: Industrial organization : competition, strategy and policy / John
Lipczynski, John O.S. Wilson and John Goddard.
Description: Fifth edition. | Harlow, England ; New York : Pearson, 2017
Identifiers: LCCN 2017002086| ISBN 9781292121710 (Print : alk. paper) | ISBN
9781292121758 (PDF) | ISBN 9781292121765 (ePub)
Subjects: LCSH: Industrial organization (Economic theory)
Classification: LCC HD2326 .L53 2017 | DDC 338.6--dc23
LC record available at https://lccn.loc.gov/2017002086
10 9 8 7 6 5 4 3 2 1
21 20 19 18 17
Print edition typeset in 10/12.5pt Times NR MT Std by 35
Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
A01 Industrial Organization 21710.indd 4 22/05/2017 17:10
, For Ollie, Benny and Jude JL
For Alison, Kat, Libby and Jean JW
For Sarah, Aimée, Thomas and Christine JG
A01 Industrial Organization 21710.indd 5 22/05/2017 17:10
,A01 Industrial Organization 21710.indd 6 22/05/2017 17:10
, Contents
Preface xxiv
Acknowledgements xxvii
Part I: Theoretical Foundations
1 Industrial organization: an introduction 3
1.1 Introduction 3
1.2 Static and dynamic views of competition 4
1.3 The structure–conduct–performance paradigm 6
1.4 Strategic management: a short diversion 27
Discussion questions 30
Further reading 31
2 Production, costs, demand and profit maximization 32
2.1 Introduction 33
2.2 Production and costs 33
2.3 Demand, revenue, elasticity and profit maximization 50
2.4 Summary 60
Discussion questions 61
Computational questions 62
Further reading 63
3 The neoclassical theory of the firm 64
3.1 Introduction 64
3.2 The neoclassical theory of the firm: historical development 65
3.3 Theories of perfect competition and monopoly 67
A01 Industrial Organization 21710.indd 7 22/05/2017 17:10
, viii | Contents
3.4 Efficiency and welfare properties of perfect competition
and monopoly 73
3.5 Theory of monopolistic competition 79
3.6 Summary 82
Discussion questions 83
Computational questions 83
4 Managerial and behavioural theories of the firm 85
4.1 Introduction 85
4.2 Critique of the neoclassical theory of the firm 86
4.3 Separation of ownership from control: managerial theories
of the firm 89
4.4 The behavioural theory of the firm 100
4.5 Summary 102
Discussion questions 103
Further reading 103
5 Transaction costs, agency and resource-based
theories of the firm 104
5.1 Introduction 104
5.2 The Coasian firm 105
5.3 Transaction costs and the theory of the firm 109
5.4 Agency theory 113
5.5 Property rights and the theory of the firm 116
5.6 The resource-based theory of the firm 117
5.7 Summary 120
Discussion questions 122
Further reading 122
6 Corporate governance 124
6.1 Introduction 124
6.2 Agency problems and the need for corporate governance 126
6.3 Instruments of corporate governance 129
6.4 Corporate governance codes of practice 133
6.5 Corporate governance: implementation and empirical evidence 136
6.6 Business ethics 142
6.7 Corporate social responsibility 148
6.8 Summary 157
Discussion questions 159
Further reading 159
A01 Industrial Organization 21710.indd 8 22/05/2017 17:10
, Contents | ix
Part II: Structural Analysis of Industry
7 Oligopoly: non-collusive models 163
7.1 Introduction 164
7.2 Interdependence, conjectural variation, independent
action and collusion 165
7.3 Models of output determination in duopoly 166
7.4 Models of price determination in duopoly 178
7.5 The kinked demand curve and models of price leadership 185
7.6 Summary 190
Discussion questions 192
Computational questions 192
Further reading 194
8 Oligopoly: collusive models 195
8.1 Introduction 195
8.2 Collusive action and collusive forms 196
8.3 Collusive institutions 200
8.4 Profit-maximizing models of price and output
determination for a cartel 203
8.5 Other motives for collusion 207
8.6 Factors conducive to cartel formation 210
8.7 Influences on cartel stability 215
8.8 Summary 225
Discussion questions 226
Further reading 226
9 Game theory 228
9.1 Introduction 229
9.2 Dominance and Nash equilibrium 230
9.3 The prisoner’s dilemma game 235
9.4 Mixed strategies 239
9.5 Sequential games 246
9.6 Repeated games 253
9.7 Summary 255
Discussion questions 256
Computational questions 257
Further reading 259
10 Concentration: measurement and trends 260
10.1 Introduction 260
10.2 Market and industry definition 261
A01 Industrial Organization 21710.indd 9 22/05/2017 17:10
