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Predation and its rate of return: the sugar industry, 1887–1914

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  • David Genesove
  • Wallace P. Mullin

Abstract

We study entry into the American sugar refining industry before World War I. We show that the price wars following two major entry episodes were predatory. Our proof is twofold: by direct comparison of price to marginal cost, and by construction of predicted competitive price cost margins that we show to exceed observed margins. We argue that predation occurred only when the relative cost of it to the dominant firm was small, and that it was most probably used to deter future capacity additions. It was also used to lower the purchase price of preexisting firms after one entry episode.

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File URL: http://hdl.handle.net/10.1111/j.1756-2171.2006.tb00003.x
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Bibliographic Info

Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 37 (2006)
Issue (Month): 1 (03)
Pages: 47-69

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Handle: RePEc:bla:randje:v:37:y:2006:i:1:p:47-69

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References

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  1. Cabral, L. & Riordan, M., 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 39, Boston University - Industry Studies Programme.
  2. Paul Milgrom & John Roberts, 1980. "Predation, Reputation, and Entry Deterrence," Discussion Papers 427, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  4. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  5. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
  6. Garth Saloner, 1987. "Predation, Mergers, and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 165-186, Summer.
  7. Hanes, Christopher, 1993. "The Development of Nominal Wage Rigidity in the Late 19th Century," American Economic Review, American Economic Association, vol. 83(4), pages 732-56, September.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
  9. Marvin B. Lieberman, 1987. "Postentry Investment and Market Structure in the Chemical Processing Industries," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 533-549, Winter.
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Citations

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Cited by:
  1. John Asker & Heski Bar-Isaac, 2014. "Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals," American Economic Review, American Economic Association, vol. 104(2), pages 672-86, February.
  2. Michiel van Leuvensteijn, 2008. "The Boone-indicator: Identifying different regimes of competition for the American Sugar Refining Company 1890-1914," Working Papers 08-37, Utrecht School of Economics.
  3. John Asker & Heski Bar-Isaac, 2012. "Vertical Practices Facilitating Exclusion," Working Papers 12-20, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Stephen Martin, 2010. "Economic Arguments in U.S. Antitrust and EU Competition Policy: Two Roads Diverged," Purdue University Economics Working Papers 1257, Purdue University, Department of Economics.

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