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Sacrifice tests for predation in a dynamic pricing model: Ordover and Willig (1981) and Cabral and Riordan (1997) meet Ericson and Pakes (1995)

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  • Besanko, David
  • Doraszelski, Ulrich
  • Kryukov, Yaroslav

Abstract

To detect the presence of predatory pricing, antitrust authorities and courts routinely ask whether a firm sacrifices current profit in exchange for the expectation of higher future profit following the exit of its rival. Because predatory pricing is an inherently dynamic phenomenon, we show in this paper how to construct sacrifice tests for predatory pricing in a modern industry-dynamics framework along the lines of Ericson and Pakes (1995). In particular, we adapt the definitions of predation due to Ordover and Willig (1981) and Cabral and Riordan (1997) to this setting and construct the corresponding sacrifice tests.

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  • Besanko, David & Doraszelski, Ulrich & Kryukov, Yaroslav, 2020. "Sacrifice tests for predation in a dynamic pricing model: Ordover and Willig (1981) and Cabral and Riordan (1997) meet Ericson and Pakes (1995)," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:indorg:v:70:y:2020:i:c:s016771871930044x
    DOI: 10.1016/j.ijindorg.2019.102522
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    References listed on IDEAS

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    Cited by:

    1. Rey, Patrick & Spiegel, Yossi & Stahl, Konrad, 2022. "A Dynamic Model of Predation," TSE Working Papers 22-1375, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Industry dynamics; Markov perfect equilibrium; Predatory pricing; Sacrifice tests;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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