11-Strategic_Behavior

11-Strategic_Behavior - Strategic Behavior Econ 425 Summer...

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Strategic Behavior Econ 425, Summer I 2008
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2 Intro b Strategic behavior: actions taken by firms to reduce actual and potential competition. - Noncooperative strategic behavior: actions taken by a firm to maximize its profits by improving its position relative to its rivals. - Cooperative strategic behavior: coordinated actions taken by all firms to reduce competition and increase their profits. b Antitrust laws designed to attack certain types of strategic behavior (Sherman Act, 1890): - Section I: price-fixing agreements; - Section II: pricing below costs.
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3 Noncooperative strategic behavior b Two conditions: - Advantage: firm must be able to act before its rival; - Commitment (credible threat): firm must demonstrate that it will follow its strategy regardless of the actions taken by its rivals. b Four well-known strategies: - predatory pricing; - limit pricing; - investment to lower costs; - raising rivals’ costs. Prerequisite: barriers to quick entry and exit.
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4 Predatory pricing b Firm lowers its price (below cost) to drive rivals out of business and scare off potential entrants. b After rivals exit market, firm raises its price. b How? - convince rivals that in can “survive” with lower prices longer; - potential entrants must believe that entering the market is unprofitable; - take control of rivals’ assets after they are driven out of market; - prey is financially constrained.
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Predatory pricing (2) b Predation is not successful with identical firms. p Q MC AC p* 1. i lowers price to p* 2. If e remains, i needs to produce q i Not a credible threat. Market
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11-Strategic_Behavior - Strategic Behavior Econ 425 Summer...

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