Queen’s University

ECON371 - Economics of Regulation

Lecturer: Lei Xu
Email: lei.xu@queensu.ca
Course website: https://leixu.org/econ371 and onQ
Location: DUNNIN11
Time: Friday 11:30AM - 2:30PM
Office Hour: Monday 11:30AM - 12:30PM (Teams Meeting Link & Sign Up Link)
TA: Stefan Arsic
Email: stefan.arsic@queensu.ca
Office Hour: Wednesday 1-4pm at Mac-Corry A501 or by appointment

Description

The objective of this course is to discuss the role of government in markets where competitive equilibria fail. During the course, we will go through the economic foundations of regulatory analysis, and how they are applied to real life scenarios that depart from the ideal of competitive markets. You will be able to recognize such market failures and to learn about the solutions devised over time to address them. You will be encouraged to evaluate the outcomes of such economic policies using concrete examples. Looking at different case studies, we will raise questions such as the following: Is economic regulation a necessity? Does regulation make up for market failure? What are the unintended consequences? Does it impose an even heavier burden to firms/consumers/society?

The course will be broken into three parts. In the first part, we will review the economic models of firm competition and the necessity of regulation from a theoretical point of view. In the second part, we will study various situations where antitrust analysis is applied. We will study market structure, horizontal/vertical mergers, price discrimination, and platform competition. In the third part, we will introduce economic regulation by studying the behavior of natural monopolies and regulatory options for dealing with them.

“One of the most exciting areas of economic policy is government regulation and antitrust. These efforts affect virtually all aspects of our lives ranging from the food we eat to the prices we pay.” (VHS). For example, what happens to the price of airline tickets if Air Canada acquires WestJet? Should Wal-Mart be banned because it drives local grocery stores out of business? Should car manufacturers be allowed to sell directly to consumers? Why is Halo not available on PlayStation? Is Apple abusing its market power by prohibiting apps to redirect users to their own website for purchases? There are countless cases of regulation, and we will only have time to cover a limited number, but we will cover the most basic rationales that can be applied in many of these issues.

Readings

Textbook: Economics of Regulation and Antitrust, Fifth Edition, By W. Kip Viscusi, Joseph E. Harrington, Jr. and David E. M. Sappington (VHS)

Newspaper/magazine: In addition to the textbook, you should keep informed about the regulatory issues by reading The Wall Street Journal or the Business section of The New York Times on a regular basis. A magazine such as Business Week or The Economist is also useful for this purpose.

Other readings: Other materials will be posted on the course website under each class. Please read the materials before class.

Prerequisite

Requirement

Overview

Short essays & presentation

Each student will work on three short essays and present their work in front of the class. Students can either work alone or in pairs. For each essay, each student can choose any real-world cases related to the material covered in class. The cases covered in each of three essays cannot be the same. The cases should not overlap with cases discussed in class or with previous student presentations, unless the student discusses the case from a different angle and provides more insights. The student(s) will make a short presentation during the class, followed by a brief Q&A from the audience. The goal of the essay and presentation is to relate the economic theory/reasoning to real-world cases and clearly convey the ideas in front of their peers.

The essay and presentation should contain background, arguments from both sides, how they are related to class material, and the student’s own analysis. The essay is evaluated based on the clarity and conciseness of the writing, relevance to class material, and the logic of the analysis. The presentation is evaluated on the same elements plus the understanding of the case through Q&A.

Each short essay should be no longer than 1 page. The presentation should be no longer than 3 minutes (to be finalized depending on class enrollment) and contains no more than 5 slides. On the first page of your presentation, please indicate your name and team ID.

The essay will be evaluated by the lecturer, and the presentation will be evaluated by all the students (instructions to follow).

Grading: Each essay and presentation receive a separate grade. So, a student choosing to finish all 3 essays and presentations will receive 6 grades. The final grade will be an average of the BEST 4 grades.

Due date: Both the essay and slides (used for in-class presentation) are due the night before each scheduled presentation. For example, for a presentation scheduled on Oct 8, both the essay and slides have to be submitted by 11:59PM of Oct 7.

Submission: The essay will be submitted through both onQ and OneDrive, and the slides submitted through OneDrive. Each team only needs to submit one copy of their essay and slides. It can be done by any of the team members.

Late submission of essay: Late submission will be penalized by 10% every day. For example, if the due date is Oct 7 and the essay was submitted on Oct 9, and if the score without penalty is 80, then the final adjusted score will be 80 x (1 - 10% x 2) = 64. Please notify me by email if you submitted late.

Late submission of slides: The slides used for in-class presentation have to be submitted before the deadline by uploading it to the appropriate folder. If not, the presenter will have to make the presentation without slides. Due to COVID protocols and time constraints, all slides will be compiled in the order of presentation before class. Before each presentation, I will show the list of presentations included in the slide deck and those who want to present but did not submit the slides on time will to present first.

Term paper & presentation

Overview: The format of the term paper is like the short essay but requires more in-depth treatment. Students can also choose to work alone or in pairs. Students are free to analyze any one or multiple cases/industries for the term paper. To get a good mark, you are expected to demonstrate knowledge of a wider reading beyond the course material and be able to connect the economic theory of regulation with the practice of regulation. It should include a significant amount of one’s original analysis. It also should include references and a bibliography.

Length: 10 to 20 pages with a minimum of 1,500 words. There is no requirement on margins, line space, etc. Please note that I will not be strict on the length of the paper but would rather focus on the quality of the content. In my experience, some students tend to add irrelevant content in their paper just to satisfy the minimum word requirement, which would be a waste of everyone’s time. If you have much to say about a topic, it could be either you have not done enough research or just a bad match and you might want to change topics.

Writing: Like the essay, the content of the term paper should be clear and concise. Some essays contain too lengthy background descriptions, and some others contain irrelevant stuff. Students should use either theoretical or empirical evidence to support their arguments. Some essays draw a conclusion using only one or two sentences of analysis without giving much support.

Topic: Students are free to choose any case(s) or industry for the term paper topic. However, it should be closely related to the class material. Note that the focus of this class is antitrust and competition, as well as the regulations related to antitrust and competition. While some topics are clearly very relevant to class material (e.g., Epic Games vs. App Store, Google Android cases), others are not so clearly. For example, we briefly touched upon the regulation of wearing masks. This topic is only relevant if the discussion focuses on its effect on competition, e.g., how this regulation affects the competitive environment in a certain industry. If you are not sure about whether a topic is a good choice, please feel free to talk to me during Monday office hours.

Economic argument: The term paper should indicate that the students clearly understand the tools and concepts covered in class and are comfortable using them to analyze other cases. It should look like a lengthy newspaper article, but rather it should be filled with economic arguments using more technical analysis. For example, when discussing a vertical merger case, students are expected to discuss concepts such as foreclosure, exclusive contracts, tying, territorial restraints, and double marginalization, as well as the standard structure to analyze a merger case: efficiency gains versus harms through less competition. Also, what are the impacts on competition, competitors, consumer welfare, industry profit, potential entrants, innovation, etc.? How is the case related to previous cases? How are they similar and different and in what ways? The textbook is an excellent source of reference with detailed analysis.

Suggestions: For your term paper, I highly recommend you go through the relevant lectures and textbook chapters in detail. You can find many cases and arguments that you can cite in relation to your own analysis.

Empirical project

We will examine a particular industry through data analysis.

The project is similar to a very long homework. Students are expected to work on this throughout the semester.

Deadline: December 13

Knowledge of a data analysis software is very helpful to successfully complete the empirical project. One can choose any of the most commonly used software such as Python, Stata, R, or Matlab.

Students are encouraged to discuss with others, but have to write their own answers for all questions.

​Class Participation

Attendance (5%): Attendance is mandatory. Attendance will be taken at random times throughout the semester.

Engagement in class (5%): During class, students are required to think critically of the materials being taught, participate in discussions and ask questions. During student presentations, students have the opportunities to raise questions and provide peer evaluation. Due to the face mask requirement during the pandemic, please place a name tag in front of you so that I can recognize the names during class.

Submission System

We will use both OneDrive and onQ for this course.

Submission Through onQ

Students have different due dates for their essays and term paper. There will be one “Assignment” for every week.

Submission Through OneDrive

Each student will receive invitations to join two shared folders: ECON371 and FirstLastName.

ECON371 is a view-only folder shared to all students. It contains presentation schedules of short essays and term papers. The project questions will also be updated to this folder.

FirstLastName folder is an editable folder shared between the lecturer and the student only. The submissions of essay and slides will be made in this folder.

Essay & Presentation Submission

The essay should be submitted in BOTH OneDrive AND onQ; the slides should be submitted using OneDrive.

Submission file requirement: All files have to be in pdf format ONLY. The essay and slides file should be named as “essay_weekX_id.pdf” and “slides_weekX_id.pdf”, where weekX should correspond to the presentation week and id corresponds to an id assigned to each presentation which can be found in essay_schedule.xlsx file in the shared folder, not your student ID. For example, according to the schedule, Lisa’s id is 24 and she is scheduled to present in week 5. The file names should be “essay_week5_24.pdf” and “slides_week5_24.pdf”.

Submitting the essay on onQ: For students with scheduled presentations in week X, the essay should be submitted under Assignment - Essay Week X by the deadline.

Submitting the essay & slides on OneDrive: For students with scheduled presentations in week X, the essay and slides should be uploaded to the shared folder FirstLastName/Essay/. The slide deck will be shared to the entire class on Friday morning in the shared ECON371 folder.

Please note the shared folder is used strictly for submission purposes. For other course-related files or files that are not final submissions, please keep them in a separate local folder.

Peer Evaluation of Presentation

The evaluations of presentations are made through the shared OneDrive folder FirstLastName/Peer Evaluation/ folder. After the presentation, students need to leave their evaluation using the file FirstLastName/Peer Evaluation/weekX.xlsx (for presentations in the Xth week). Later, the lecturer collects all the evaluations in each student’s folder and calculates the score for each presenter. Each presenter will get notified of their grades in FirstLastName/Essay/grade_weekX.txt file. The evaluations are due by each Friday night.

The grade should be out of 100. For a grade of 85, please enter 85 in the excel cell, not 85%. If the row corresponds to yourself, please leave it empty.

The final grade of each presentation will be calculated as the median of all peer evaluation.

Course Outline & Reading List

Week 1 (September 10)
Introduction of Economics of Regulation
Reading: VHS Chapters 1, 2

Week 2 (September 17)
Competition Theory (Industrial Organization)
Reading: VHS Chapters 3, 4

Week 3 (September 24)
Market Structure, Dynamic Competition and Horizontal Mergers
Reading: VHS Chapters 5, 6

Week 4 (October 1)
Empirical Industrial Organization, Vertical Markets
Reading: VHS Chapters 7

Week 5 (October 8)
Monopolization, Antitrust in the New Economy
Reading: VHS Chapters 8, 9

Week 6 (October 15)
No classes (mid-term break)

Week 7 (October 22)
Antitrust in the New Economy
Reading: VHS Chapters 9

Week 8 (October 29)
Economic Regulation
Reading: VHS Chapters 10, 11

Week 9 (November 5)
Telecommunications Industry, Estimation Methods
Reading: VHS Chapters 14, 15

Week 10 (November 12)
Airline and Finance Industries
Reading: VHS Chapters 16, 18

Week 11 (November 19)
Term Paper Presentation

Week 12 (November 26)
Term Paper Presentation

Week 13 (December 3)
Term Paper Presentation

Others