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A Simple Theory of Predation

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  • Chiara Fumagalli

    (Università Bocconi, CSEF and CEPR)

  • Massimo Motta

    (Università di Bologna and CEPR)

Abstract

We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.15.

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Date of creation: Feb 2010
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Handle: RePEc:fem:femwpa:2010.15

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Keywords: Anticompetitive Behaviour; Exclusion; Below-Cost Pricing; Antitrust;

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References

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  1. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February.
  2. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-84, June.
  3. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  4. Liliane Karlinger & Massimo Motta, 2012. "Exclusionary Pricing When Scale Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 60(1), pages 75-103, 03.
  5. 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.
  6. Liliane Karlinger & Massimo Motta, 2007. "Exclusionary Pricing and Rebates When Scale Matters," Economics Working Papers ECO2007/30, European University Institute.
  7. Gans, Joshua S. & King, Stephen P., 2002. "Exclusionary contracts and competition for large buyers," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1363-1381, November.
  8. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  9. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
  10. Fumagalli, Chiara & Motta, Massimo, 2002. "Exclusive Dealing and Entry, when Buyers Compete," CEPR Discussion Papers 3493, C.E.P.R. Discussion Papers.
  11. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December.
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