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A Dynamic Model of Predation

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  • Rey, Patrick
  • Spiegel, Yossi
  • Stahl, Konrad

Abstract

We study the feasibility and profitability of predation in a parsimonious infinite-horizon, complete information setting where an incumbent may face an entrant, in which case it needs to decide whether to accommodate or predate it. If the entrant exits, a new entrant is born with positive probability. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, predation with no future entry, and predation with hit-and-run entry. We use the model to study alternative antitrust policies, derive the best rules for these policies, and compare their welfare effects.

Suggested Citation

  • Rey, Patrick & Spiegel, Yossi & Stahl, Konrad, 2022. "A Dynamic Model of Predation," CEPR Discussion Papers 17428, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17428
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    1. 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).
    2. Aaron Edlin & Catherine Roux & Armin Schmutzler & Christian Thöni, 2019. "Hunting Unicorns? Experimental Evidence on Exclusionary Pricing Policies," Journal of Law and Economics, University of Chicago Press, vol. 62(3), pages 457-484.
    3. 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.
    4. 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.
    5. Chiara Fumagalli & Massimo Motta, 2013. "A Simple Theory of Predation," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 595-631.
    6. David Genesove & Wallace P. Mullin, 2006. "Predation and its rate of return: the sugar industry, 1887–1914," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 47-69, March.
    7. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-1140, September.
    8. David Genesove & Wallace Mullin, 2006. "Predation and Its Rate of Return: The Sugar Industry, 1887Ð1914," RAND Journal of Economics, The RAND Corporation, vol. 37(1), pages 47-69, Spring.
    9. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    10. David Besanko & Ulrich Doraszelski & Yaroslav Kryukov, 2014. "The Economics of Predation: What Drives Pricing When There Is Learning-by-Doing?," American Economic Review, American Economic Association, vol. 104(3), pages 868-897, March.
    11. Bruce H. Kobayashi, 2010. "The Law and Economics of Predatory Pricing," Chapters, in: Keith N. Hylton (ed.), Antitrust Law and Economics, chapter 6, Edward Elgar Publishing.
    12. Roberts, John, 1986. "A Signaling Model of Predatory Pricing," Oxford Economic Papers, Oxford University Press, vol. 38(0), pages 75-93, Suppl. No.
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    More about this item

    Keywords

    Predation; Accommodation; Entry; Legal rules; Markov perfect equilibrium;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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