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A Simple Theory of Predation

Listed author(s):
  • Chiara Fumagalli
  • Massimo Motta

We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterized by common costs. Conditions under which predation may (or not) take place in actual cases are also discussed.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 437.

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Date of creation: 2012
Handle: RePEc:igi:igierp:437
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  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. 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.
  3. 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, 06.
  4. Liliane Karlinger & Massimo Motta, 2007. "Exclusionary Pricing and Rebates When Scale Matters," Economics Working Papers ECO2007/30, European University Institute.
  5. 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.
  6. Harrington, Joseph Jr., 1989. "Collusion and predation under (almost) free entry," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 381-401.
  7. 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.
  8. 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.
  9. Liliane Karlinger & Massimo Motta, 2012. "Exclusionary Pricing When Scale Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 60(1), pages 75-103, 03.
  10. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  11. Chiara Fumagalli & Massimo Motta, 2008. "Buyers' Miscoordination, Entry and Downstream Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1196-1222, 08.
  12. 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.
  13. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
  14. 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.
  15. 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.
  16. 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.
  17. Garth Saloner, 1987. "Predation, Mergers, and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 165-186, Summer.
  18. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-584, June.
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