Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies
University of Zurich, Department of Economics, Working Paper No. 258
67 Pages Posted: 7 Jul 2017 Last revised: 29 Nov 2017
Date Written: June 1, 2017
We study the anticompetitive effects of predatory pricing and the efficacy of three policy responses. In a series of experiments where an incumbent and a potential entrant interact, we compare prices, market structures and welfare. Under a laissez-faire regime, the threat of post-entry price cuts discourages entry, and allows incumbents to charge monopoly prices. Current U.S. policy (Brooke Group) does not help. A policy suggested by Baumol (1979) lowers post-exit prices, while Edlin’s (2002) proposal reduces pre-entry prices and encourages entry. While both policies show outcomes after entry that are less competitive than under Laissez-Faire, they nevertheless increase consumer welfare.
Keywords: predatory pricing, entry deterrence, firm strategy, antitrust law, experiment
JEL Classification: D21, K21, L12, L13, C91
Suggested Citation: Suggested Citation