ch13 - Predatory Conduct Recent Developments Chapter 13...

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Chapter 13: Predatory Conduct: recent developments 1 Predatory Conduct: Recent Developments
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Chapter 13: Predatory Conduct: recent developments 2 Introduction Charges of predatory conduct are not new Microsoft is only one of the latest goes back to the days of Standard Oil more recent examples of predatory pricing Wal-Mart American Airlines But they face problems of credibility price low to eliminate rivals then raise price so why don’t rivals reappear?
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Chapter 13: Predatory Conduct: recent developments 3 Predatory pricing: myth or reality? Theoretical and empirical doubts predation is generally not subgame perfect without uncertainty regarding the incumbent return to this below McGee’s argument that predation is dominated by another strategy merger is more profitable than predation so predation should not happen take an example two period market • inverse demand P = A – B ( q L + q F ) q F is output of leader and q F is output of follower leader is a Stackelberg quantity leader both leader and follower have constant marginal costs of c
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Chapter 13: Predatory Conduct: recent developments 4 An example of predation At the Stackelberg equilibrium leader makes ( A – c ) 2 /8 B follower makes ( A – c ) 2 /16 B if the leader were a monopolist it would make ( A – c ) 2 /4 B Suppose that the leader predates in period 1 sets output ( A – c )/ B to drive price to marginal cost follower does not enter leader reverts to monopoly output in period 2 but the follower does not enter aggregate profit is ( A – c ) 2 /4 B
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Chapter 13: Predatory Conduct: recent developments 5 An example of predation 2 Suppose instead that the leader offers to merge with the follower in period 1 monopoly in both periods aggregate profit ( A – c ) 2 /2 B so the leader can make a merger offer that the follower will accept Merger is more profitable than predation but: merger may not be allowed by the authorities monopoly power what if there are additional potential entrants? may enter purely in the hope of being bought out Main point remains: threat of predation has to be credible if it is to work
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Chapter 13: Predatory Conduct: recent developments 6 Predation and imperfect information Suppose that the entrant faces financial constraints must borrow to finance entry Entrant also faces uncertainty pre-entry faces some probability of “low” returns private information that can be concealed from bank incentive to misrepresent bank must then enforce removal of funding if low returns are reported Incumbent then has incentive to take actions that increase probability of failure
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Chapter 13: Predatory Conduct: recent developments 7 Asymmetric information and limit pricing The preemption “games” are ways of resolving the Chain- store paradox indicate that it is rational for incumbents to make investments that
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ch13 - Predatory Conduct Recent Developments Chapter 13...

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