Abstract

http://ssrn.com/abstract=1976050
 
 

References (46)



 
 

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The Economics of Predation: What Drives Pricing When There is Learning-by-Doing?


David Besanko


Northwestern University - Kellogg School of Management

Ulrich Doraszelski


Harvard University - Department of Economics; University of Pennsylvania - Business & Public Policy Department

Yaroslav Kryukov


Tepper School of Business, CMU

December 2011

CEPR Discussion Paper No. DP8708

Abstract:     
Predatory pricing -- a deliberate strategy of pricing aggressively in order to eliminate competitors -- is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterize predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing.

We first show that predation-like behavior arises routinely in our model. Equilibria involving predation-like behavior typically coexist with equilibria involving much less aggressive pricing. To disentangle predatory pricing from mere competition for efficiency on a learning curve we next decompose the equilibrium pricing condition. Our decomposition provides us with a coherent and flexible way to develop alternative characterizations of a firm’s predatory pricing incentives, some of which are motivated by the existing literature while others are novel. We finally measure the impact of the predatory pricing incentives on industry structure, conduct, and performance. We show that forcing a firm to ignore these incentives in setting its price can have a large impact and that this impact stems from eliminating equilibria with predation-like behavior. Along with the predation-like behavior, however, a fair amount of competition for the market is eliminated. Overall, the distinction between predatory pricing and pricing aggressively to pursue efficiency is closely related to the distinction between the advantage-building and advantage-denying motives that our decomposition of the equilibrium pricing condition isolates and measures.

Number of Pages in PDF File: 44

Keywords: competition policy, industry dynamics, predatory pricing

JEL Classification: C73, L13, L44

working papers series


Date posted: December 22, 2011  

Suggested Citation

Besanko, David and Doraszelski, Ulrich and Kryukov, Yaroslav, The Economics of Predation: What Drives Pricing When There is Learning-by-Doing? (December 2011). CEPR Discussion Paper No. DP8708. Available at SSRN: http://ssrn.com/abstract=1976050

Contact Information

David A. Besanko (Contact Author)
( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-7753 (Phone)
847-467-1777 (Fax)
Ulrich Doraszelski
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-495-2896 (Phone)
617-495-8570 (Fax)
University of Pennsylvania - Business & Public Policy Department
3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Yaroslav Kryukov
Tepper School of Business, CMU ( email )
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
Feedback to SSRN


Paper statistics
Abstract Views: 385
Downloads: 6
References:  46
Citations:  1
Footnotes:  30

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