strategies,publicpoliciesandtheperformanceofmarketmechanisms.Section3reviewstheburgeoningliteratureontheeconomicsofnetworkindustries,includingairlinenetworks,accesspricingandinterconnectionpoliciesintelecommunications,creditcardpaymentsystems,industryagglomeration,aswellastheroleofnetworkexternalitiesandthetheoryoftwo-sidedmarkets.Section4isdevotedtothetheoryofmarketdesignwithafocusonauctiondesign.Inthelastsectionweconsiderforeigndirectinvestment,atopicattheintersectionofindustrialeconomicsandinternationaltradetheory.

2.

2.1.GameTheoryandIndustrialEconomicsGame-theoreticModelsofBusinessStrategiesandPublicPolicies.Gametheoryprovidesaframeworkforanalyzingbusinessstrategiesandgovernmentpolicies.Byformallyspecifyingtheplayers’availableinformationandstrategies,aswellasthesequenceofchoices,gametheoryhelpspredicthowplayersbehavestrategicallyandevaluatetheconsequencesofthestrategicinteractions.Insteadofprovidingacompletereviewofthetheoryweuseanumberofexamplestoillustratetheusefulnessofgametheoryinmodelingcompetitionandbusinessstrategies.

Webeginwithabriefdiscussiononsimultaneous-movegames,orsometimescalledgamesinnormalform.Itconsistsofthreebasicelements:Anumberofplayers,asetofstrategiesforeachplayer,andapayo functionforeachplayerwhichmapsthewholestrategypro leintoherpayo s.Thewell-knownCournotmodelandBertrandmodelofoligopolyaregoodexamplesofsimultaneous-movegames.Thegame-theoreticformulationofoligopolymodelsisnotlimitedtotheanalysisoftheclassicalCournotorBertrandmodels.Theanalysiscanbeextendedtoavarietyofstrategiesthat rmsmayuse,includingcapacitydecision,qualitychoices,productdi erentiation,R&Dinvestment,advertising,andsoon.3

ItiswellknownthattheuniqueNashequilibriuminthesymmetricBertrandmodelissuchthatboth rmssetpricesequaltotheirmarginalcostandtheydonotmakeanypositivepro t.ThisresultisknownastheBertrandparadox,“Oneismonopoly,twoisperfectcompetition”.Itwouldseemtocontradictcommonob-servationsintwoways:inmarketswithfewsellers, rmstypicallydonotsellatmarginalcosts;andeveninperiodsoftechnologicalanddemandstability,pricesinoligopolisticmarketsarenotalwaysstable.GametheoryishelpfulinresolvingtheBertrandparadoxbyexamining,forexample,theroleofcapacityinpricecom-petition.Inpractice, rmstypicallydonothaveenoughcapacitytoservicetheentiremarketdemandwhenundercuttingpricestowardtheirmarginalcosts.Inthe3SeeShapiro(1989)forsomeexamplesandgeneraldiscussions.