The economics of predation: What drives pricing when there is learning-by-doing?
Predatory pricing - a deliberate strategy of pricing aggressively in order to eliminate competitors - is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterizes predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We show that we can isolate and measure a firm's predatory incentives by decomposing the equilibrium pricing condition. Our decomposition maps into existing economic definitions of predation and provides us with a coherent and flexible way to develop alternative characterizations of a firm's predatory incentives. We ask three interrelated questions. First, when does predation-like behavior arise? Second, what drives pricing and, in particular, how can we separate predatory incentives for pricing aggressively from efficiency-enhancing incentives for pricing aggressively in order to move further down the learning curve? Third, what is the impact of predatory incentives on industry structure, conduct, and performance?
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- R. E. Caves & M. E. Porter, 1977. "From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 241-261.
- Dudley, Leonard, 1972. "Learning and Productivity Change in Metal Products," American Economic Review, American Economic Association, vol. 62(4), pages 662-69, September.
- Edlin, Aaron S. & Farrell, Joseph, 2002.
"The American Airlines Case: A Chance to Clarify Predation Policy,"
Competition Policy Center, Working Paper Series
qt32h8b40m, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Aaron S. Edlin & Joseph Farrell, 2004. "The American Airlines Case: A Chance to Clarify Predation Policy," Law and Economics 0401003, EconWPA.
- Edlin, Aaron S. & Farrell, Joseph, 2002. "The American Airlines Case: A Chance to Clarify Predation Policy," Department of Economics, Working Paper Series qt0wx7c4zf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ron Jarmin, 1993.
"Learning By Doing And Competition In The Early Rayon Industry,"
93-4, Center for Economic Studies, U.S. Census Bureau.
- Ronald S. Jarmin, 1994. "Learning by Doing and Competition in the Early Rayon Industry," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 441-454, Autumn.
- 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.
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