And llarge firm will increase prices and recoup

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Unformatted text preview: losses incurred during arge predation predation 14 14 McGee (1958) criticism Large firm cannot successfully apply predatory pricing (4 reasons) 1. Due to larger market share, large firm will also suffer from larger Due losses than small firm losses 1. Predation would only make sense if large firm can raise prices after Predation exit of small firm exit 1. but assets and plants of smaller firm will not disappear. As soon as prices but rise, small firm can enter again (or assets are bought by somebody who could enter) could Assumption: Predator has deep pocket, and victim small pocket. 1. same unit loss multiplied by larger number of units Why could small (financially constrained) firm not explain the situation to Why potential investors (bank) to obtain funds until predation ends ( potential combined with 1st argument!) combined Predation to be rational, must be more profitable than alternative Predation actions. actions. Merging with rival would be more profitable, as industry profits are not Merging destroyed during a predation phase. destroyed 15 15 response to McGee (1958) criticism 1. „deep pocket“ does hold if incumbent has deep dominant position in several markets, but small firm doesn‘t firm 1. Incumbent could set high prices in one market, and Incumbent predatory prices in the challenged market. Crosspredatory subsidizing among markets gives incumbent subsidizing „deeper pockets“ „deeper Re-entering relies on the ideas that no sunk Re-entering cost are involved. However, fixed sunk cost are typical in reality. After exit, a firm can only recover a small fraction of fixed cost. recover Also: successful predation may deter future entry Also: through aggressive reputation of incumbent through 16 16 response to McGee (1958) criticism 33 4. recent theories in area of corporate finance. To be discussed later To merger vs. predation 1. 2. 3. buying a firm may encourage new firms to enter buying with aim to sell out to incumbent with profit mergers may not be cheap after all. mergers Taking over rivals may not be allowed for dominant Taking firms firms One could use predation to reduce price of merger. One Thus merger and predation no mutually exclusive strategies strategies Empirically observed already in 1891-1906: „American Empirically Tobacco“ engaged in price wars with small competitors and took over 43 competitors. Evidence that merger prices were much lower after predation phases. were 17 17 Recent theories on predation Recent economic theories rely on Recent „imperfect information“ assumptions „imperfect Three main paths: 1. 2. 3. Reputation Signalling Financial markets models of deep pocket Financial predation predation 18 18 Reputation based models Suppose Suppose an incumbent monopolist is active in a number of identical markets, where it has the same technology and products (e.g. (e.g. „chain-store“ chain store paradox by Reinhard Selten, Nobel Prize winning theory!!!) Selten, In In each market there is one potential entran...
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