Are Excessive Prices Really Self-Correcting?
Posted: 1 Jun 2009
Date Written: June 2009
Excessive pricing by a dominant firm is considered as one of the most blatant forms of abuse. Despite this, competition authorities frequently refrain from intervening against excessive prices. The non-interventionist approach is based, among others, on the premise that high prices encourage new entry and thereby should be feared less. According to this view, in many cases, excessive prices are likely to be competed away and make intervention redundant. This paper questions this conventional view and reconsiders whether excessive prices are indeed self-correcting. It illustrates how, in the majority of cases, excessive prices will not attract new entry of viable competitors, whether entry barriers are high or low. Furthermore, it shows how, at times, the prohibition of excessive prices may encourage, rather than discourage, entry. By doing so, this paper narrows and focuses the arguments against intervention. Accordingly, it concludes that if excessive pricing is not to be prohibited, it should not be because it is thought to be “self-correcting,” but rather for reasons such as the need to stimulate investment or difficulties of implementation, which should be assessed on a case by case basis.
Keywords: K21, L4
Suggested Citation: Suggested Citation