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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 dynamic environment, using a parsimonious infinite-horizon, complete information setting in which an incumbent repeatedly faces potential entry. When a rival enters, the incumbent chooses whether to accommodate or predate it; the entrant then decides whether to stay or exit. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, monopolization, and recurrent predation. We then analyze and compare the welfare effects of different antitrust policies, accounting for the possibility that recurrent predation may be welfare improving.

Suggested Citation

  • Rey, Patrick & Spiegel, Yossi & Stahl, Konrad, 2022. "A Dynamic Model of Predation," TSE Working Papers 22-1375, Toulouse School of Economics (TSE), revised Apr 2024.
  • Handle: RePEc:tse:wpaper:127458
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
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    5. 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.
    6. 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).
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    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.
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    More about this item

    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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