If ineffcient monopoly no will break but otherwise

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Unformatted text preview: 24 24 Signalling models Second: no no price where high-cost incumbent can profitably sell and be distinguished from low-cost incumbent and low cost incumbent will set its normal monopoly price high cost incumbent will imitate in order to deter entry Here: predation! Weak incumbent sets low price only Here: for the reason to stay monopolist in 2nd period! for this is negative for welfare. 25 25 Predation in Imperfect Financial Markets Why Why does small firm/challenger have limited access to funding? limited If capital market were perfect, any If profitable undertaking would find a sponsor sponsor and and thus also small firm that explains bank that large firm cannot fight for long, and if it gets credit now, it will be able to achieve duopoly profit after predation phase duopoly 26 26 Predation in Imperfect Financial Markets How can predation work then? imperfect information on side of lenders (who only have incomplete knowledge about industry) only Consider: Incumbent Incumbent is established and has a lot of own resources resources small firm has to borrow money for entry and small predation phase predation Predation Predation will reduce possibilities for small firm to raise money, as predation reduces profits, and thus retained earnings, and consequently assets that could serve as collateral in bank loan negotiations. collateral 27 27 Predatory Pricing: Policy implications Predatory Policy Two steps to test for predation 1. 2. Analyze industry to determine market power of the Analyze firm. (In European guidelines, dominant position would only be possible with market share > 40%). would If the firm is not dominant, dismiss case. Otherwise: Analyze the relationship between price and cost: P > average total cost (ATC) lawful average P < ATC, but above Av. variable cost (AVC) should be ATC, presumed lawful presumed P < AVC presumed unlawful AVC with burden to prove the opposite on the plaintiff with burden to prove the opposite on the defendant Note: very carefully used by EC, as low prices Note: are usually welcomed by consumers, and it is difficult to distinguish normal competitive behavior from abuse of dominant position. behavior 28 28 Non-Price Monopolisation Practices Two topics Strategic Investments Bundling and Tying 29 29 Strategic Investments Investments Investments in capacity, R&D, advertising, product quality, new brands, etc. product As As we will see: there is no benchmark that could be used by anti-trust policy for deciding whether an investment is a honest attempt to be more competitive (or make firm‘s products more appealing to consumers) or to monopolize the market unlawfully. consumers) Also: Also: Most investments have a positive effect on welfare one should not discourage them from investing investing Only very rare cases when a firm should be Only accused of over-investment. accused 30 30 Strategic Investments Consider R&D: Consider Facing competition, it makes sense that monopolist Facing invests to reduce its cost i...
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