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Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies

Author

Listed:
  • Schmutzler, Armin
  • Edlin, Aaron
  • Roux, Catherine
  • Thoeni, Christian

Abstract

We study the anti-competitive effects of predatory pricing and the efficacy of three policy responses. In a series of experiments where an incumbent and a potential entrant interact, we compare prices, market structures and welfare. Under a laissez-faire regime, the threat of post-entry price cuts discourages entry, and allows incumbents to charge monopoly prices. Current U.S. policy (Brooke Group) does not help. A policy suggested by Baumol (1979) lowers post-exit prices, while Edlin’s (2002) proposal reduces pre-entry prices and encourages entry. While both policies show outcomes after entry that are less competitive than under Laissez-Faire, they nevertheless increase consumer welfare.

Suggested Citation

  • Schmutzler, Armin & Edlin, Aaron & Roux, Catherine & Thoeni, Christian, 2017. "Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies," CEPR Discussion Papers 12125, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12125
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    Keywords

    Predatory pricing; Entry deterrence; Firm strategy; Antitrust law; Experiment;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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