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A Simple Theory of Predation


  • Fumagalli, Chiara
  • Motta, Massimo


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.

Suggested Citation

  • Fumagalli, Chiara & Motta, Massimo, 2009. "A Simple Theory of Predation," CEPR Discussion Papers 7372, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7372

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    References listed on IDEAS

    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. 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.
    3. 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.
    4. 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.
    5. Joseph Farrell & Michael L. Katz, 2005. "Competition Or Predation? Consumer Coordination, Strategic Pricing And Price Floors In Network Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 203-231, June.
    6. Liliane Karlinger & Massimo Motta, 2007. "Exclusionary Pricing and Rebates When Scale Matters," Economics Working Papers ECO2007/30, European University Institute.
    7. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-1145, December.
    8. Chiara Fumagalli & Massimo Motta, 2008. "Buyers' Miscoordination, Entry and Downstream Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1196-1222, August.
    9. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    10. Garth Saloner, 1987. "Predation, Mergers, and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 165-186, Summer.
    11. Harrington, Joseph Jr., 1989. "Collusion and predation under (almost) free entry," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 381-401.
    12. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, vol. 96(3), pages 785-795, June.
    13. Yamey, B S, 1972. "Predatory Price Cutting: Notes and Comments," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 129-142, April.
    14. Liliane Karlinger & Massimo Motta, 2012. "Exclusionary Pricing When Scale Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 60(1), pages 75-103, March.
    15. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
    16. 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.
    17. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-584, June.
    18. 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.
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    Cited by:

    1. Vasconcelos, Helder, 2015. "Is exclusionary pricing anticompetitive in two-sided markets?," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 1-10.
    2. repec:kap:iaecre:v:21:y:2015:i:3:p:287-298 is not listed on IDEAS
    3. George Geronikolaou, 2015. "On the Effect of Market Share Dispersion on New Firm Entry," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 21(3), pages 287-298, August.

    More about this item


    Anticompetitive behaviour; Antitrust; Below-cost pricing; Exclusion;

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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