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The economics of predation: What drives pricing when there is learning-by-doing?

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    Abstract

    Predatory pricing - a deliberate strategy of pricing aggressively in order to eliminate competitors - is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterizes predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We show that we can isolate and measure a firm's predatory incentives by decomposing the equilibrium pricing condition. Our decomposition maps into existing economic definitions of predation and provides us with a coherent and flexible way to develop alternative characterizations of a firm's predatory incentives. We ask three interrelated questions. First, when does predation-like behavior arise? Second, what drives pricing and, in particular, how can we separate predatory incentives for pricing aggressively from efficiency-enhancing incentives for pricing aggressively in order to move further down the learning curve? Third, what is the impact of predatory incentives on industry structure, conduct, and performance?

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    File URL: https://student-3k.tepper.cmu.edu/gsiadoc/WP/2011-E30.pdf
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    Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2011-E30.

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    Handle: RePEc:cmu:gsiawp:-878519102

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    Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
    Web page: http://www.tepper.cmu.edu/

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    Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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    1. Ron Jarmin, 1993. "Learning By Doing And Competition In The Early Rayon Industry," Working Papers 93-4, Center for Economic Studies, U.S. Census Bureau.
    2. Peter Thompson, 2007. "How Much Did the Liberty Shipbuilders Forget?," Management Science, INFORMS, vol. 53(6), pages 908-918, June.
    3. Aaron S. Edlin & Joseph Farrell, 2004. "The American Airlines Case: A Chance to Clarify Predation Policy," Law and Economics 0401003, EconWPA.
    4. Dudley, Leonard, 1972. "Learning and Productivity Change in Metal Products," American Economic Review, American Economic Association, vol. 62(4), pages 662-69, September.
    5. Ordover, Janusz A. & Saloner, Garth, 1989. "Predation, monopolization, and antitrust," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 9, pages 537-596 Elsevier.
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