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

See all articles by Aaron S. Edlin

Aaron S. Edlin

University of California at Berkeley; National Bureau of Economic Research (NBER)

Catherine Roux

University of Basel

Armin Schmutzler

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

Christian Thöni

University of Lausanne

Date Written: June 1, 2017

Abstract

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

Edlin, Aaron S. and Roux, Catherine and Schmutzler, Armin and Thöni, Christian, Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies (June 1, 2017). University of Zurich, Department of Economics, Working Paper No. 258. Available at SSRN: https://ssrn.com/abstract=2997073 or http://dx.doi.org/10.2139/ssrn.2997073

Aaron S. Edlin (Contact Author)

University of California at Berkeley ( email )

Dept of Economics 549 Evans Hall #3880
Berkeley, CA 94720
United States
510-642-4719 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Catherine Roux

University of Basel ( email )

Basel
Switzerland

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christian Thöni

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

HOME PAGE: http://https://sites.google.com/site/christianthoeni/

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