Predation Under Perfect Information
17 Pages Posted: 17 Mar 2010 Last revised: 7 Apr 2010
Date Written: March 12, 2010
In an oligopoly configuration characterized by high barriers to (re-)entry, a finite horizon, perfect information about demand and costs and the presence of three identical firms, we show that two of them (the predators) can choose to charge an initial price that is so low that the third (the prey) decides to exit immediately, after which the predators can enjoy higher profits, even if they do not raise their price. Predatory prices are thus observed on the equilibrium path and the predators end up earning more than in the best Bertrand (or even, collusive) equilibrium with three firms.
Keywords: predation, predatory pricing, collusion, dynamic game, Bertrand competition
JEL Classification: D43, L13, L41
Suggested Citation: Suggested Citation