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A Dynamic Model of Predation

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Listed:
  • Patrick Rey

  • Yossi Spiegel

  • Konrad Stahl

Abstract

We study the feasibility and profitability of predtion 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 predtion may be welfare improving.

Suggested Citation

  • Patrick Rey & Yossi Spiegel & Konrad Stahl, 2024. "A Dynamic Model of Predation," CRC TR 224 Discussion Paper Series crctr224_2024_529, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_529
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    References listed on IDEAS

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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.
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    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.
    6. 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.
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    2. Fabian Raoul Pieroth & Ole Petersen & Martin Bichler, 2025. "Algorithmic Predation: Equilibrium Analysis in Dynamic Oligopolies with Smooth Market Sharing," Papers 2510.27008, arXiv.org.

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    Keywords

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    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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