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The economics of predation: What drives pricing when there is learning-by-doing?

  • Besanko, David
  • Doraszelski, Ulrich
  • Kryukov, Yaroslav
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    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 characterize predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We first show that predation-like behavior arises routinely in our model. Equilibria involving predation-like behavior typically coexist with equilibria involving much less aggressive pricing. To disentangle predatory pricing from mere competition for efficiency on a learning curve we next decompose the equilibrium pricing condition. Our decomposition provides us with a coherent and flexible way to develop alternative characterizations of a firm’s predatory pricing incentives, some of which are motivated by the existing literature while others are novel. We finally measure the impact of the predatory pricing incentives on industry structure, conduct, and performance. We show that forcing a firm to ignore these incentives in setting its price can have a large impact and that this impact stems from eliminating equilibria with predation-like behavior. Along with the predation-like behavior, however, a fair amount of competition for the market is eliminated. Overall, the distinction between predatory pricing and pricing aggressively to pursue efficiency is closely related to the distinction between the advantage-building and advantage-denying motives that our decomposition of the equilibrium pricing condition isolates and measures.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8708.

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    Date of creation: Dec 2011
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    Handle: RePEc:cpr:ceprdp:8708
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    1. Ron Jarmin, 1993. "Learning By Doing And Competition In The Early Rayon Industry," Working Papers 93-4, Center for Economic Studies, U.S. Census Bureau.
    2. Dudley, Leonard, 1972. "Learning and Productivity Change in Metal Products," American Economic Review, American Economic Association, vol. 62(4), pages 662-69, September.
    3. 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.
    4. Victor Aguirregabiria, 2009. "A Method for Implementing Counterfactual Experiments in Models with Multiple Equilibria," Working Papers tecipa-381, University of Toronto, Department of Economics.
    5. Aaron S. Edlin & Joseph Farrell, 2004. "The American Airlines Case: A Chance to Clarify Predation Policy," Law and Economics 0401003, EconWPA.
    6. 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.
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