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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
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
profitable undertaking would find a
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
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
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.
27 Predatory Pricing: Policy implications
Policy Two steps to test for predation
1. 2. Analyze industry to determine market power of the
firm. (In European guidelines, dominant position
would only be possible with market share > 40%).
If the firm is not dominant, dismiss case. Otherwise:
Analyze the relationship between price and cost: P > average total cost (ATC) lawful
P < ATC, but above Av. variable cost (AVC) should be
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
are usually welcomed by consumers, and it is
difficult to distinguish normal competitive
behavior from abuse of dominant position.
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.
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.
Also: Most investments have a positive effect on
welfare one should not discourage them from
investing Only very rare cases when a firm should be
accused of over-investment.
30 Strategic Investments Consider R&D:
Consider Facing competition, it makes sense that monopolist
invests to reduce its cost
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- Spring '13