A Simple Theory of Predation

26 Pages Posted: 25 Feb 2010

See all articles by Chiara Fumagalli

Chiara Fumagalli

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Massimo Motta

Universitat Pompeu Fabra

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Date Written: February 25, 2010

Abstract

We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

Keywords: Anticompetitive Behaviour, Exclusion, Below-Cost Pricing, Antitrust

JEL Classification: K21, L12, L40

Suggested Citation

Fumagalli, Chiara and Motta, Massimo, A Simple Theory of Predation (February 25, 2010). FEEM Working Paper No. 15. 2009. Available at SSRN: https://ssrn.com/abstract=1558964 or http://dx.doi.org/10.2139/ssrn.1558964

Chiara Fumagalli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Massimo Motta

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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