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Predatory Pricing The Elementary Economics by raz34238

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									                                                               Predatory Pricing: The Elementary Economics




      When Does Predatory Pricing Work?


             P    (Monthly Sacrifice)                  P+R (Monthly Return)
             ∑          (1 + i)k
                                            vs.        ∑        (1 + i)k
            k=1                                       k=P+1



Predator wants these to be SMALL:                 Predator wants these to be LARGE:

 ™ Monthly Sacrifice                               ™ Monthly Return

 ™ “P” — the number of months of                   ™ “R”— the number of months of
   predation                                         recoupment

 ™ “i” — the monthly hurdle rate


                                   An important asymmetry:
                  Slow Entry, but Quick Exits by Target Firms
                                                                                                                         Predatory Pricing: The Elementary Economics



                          Detroit-Philadelphia

            Northwest’s and Spirit’s Average One-Way Fares 

                     for “True Local” Passengers

$300


                                                                                              Predation
                                                                                               Period
$250




                     Northwest
$200




$150




$100
                                                                      Spirit




 $50




  $0
   Jan-95           Apr-95          Aug-95           Nov-95            Mar-96           Jun-96           Oct-96           Jan-97           May-97           Aug-97              Dec-97

   *Northwest defines three types of local passengers: "true local", "connecting local", and "multi-destination local." "True local" passengers are nonstop local passengers.
                                                                                                                         Predatory Pricing: The Elementary Economics



                            Detroit-Boston
            Northwest’s and Spirit’s Average One-Way Fares 

                     for “True Local” Passengers

$300

                                                                                    Predation Period


$250
                        Northwest



$200




$150




$100




 $50                                                                                    Spirit




  $0
   Jan-95          Apr-95           Aug-95           Nov-95            Mar-96           Jun-96           Oct-96           Jan-97           May-97           Aug-97              Dec-97
   *Northwest defines three types of local passengers: "true local", "connecting local", and "multi-destination local." "True local" passengers are nonstop local passengers.
                                                                                                                                                                                                                  Predatory Pricing: The Elementary Economics



                                                                       Detroit-Boston
                                                               Northwest’s Fare Distribution for 

                                                        Local Passengers Before the Alleged Predation

                                                                     1995 Q2 – 1995 Q4
                                                  25%
Percent of passengers flying at each fare range




                                                  20%




                                                  15%




                                                  10%




                                                  5%




                                                  0%
                                                        <40

                                                              40-59

                                                                      60-79

                                                                              80-99

                                                                                      100-119

                                                                                                120-139

                                                                                                          140-159

                                                                                                                    160-179

                                                                                                                              180-199

                                                                                                                                        200-219

                                                                                                                                                  220-239

                                                                                                                                                            240-259

                                                                                                                                                                      260-279

                                                                                                                                                                                280-299

                                                                                                                                                                                          300-319

                                                                                                                                                                                                    320-339

                                                                                                                                                                                                              340-359

                                                                                                                                                                                                                        360-379

                                                                                                                                                                                                                                  380-399

                                                                                                                                                                                                                                            400-419

                                                                                                                                                                                                                                                      420-439

                                                                                                                                                                                                                                                                440-459

                                                                                                                                                                                                                                                                          460-479

                                                                                                                                                                                                                                                                                    480-499

                                                                                                                                                                                                                                                                                              >500
                                                                                                                                          Fare Ranges (U.S. Dollars)
                                                                                                                                                                                                                                  Note: Data were not available for 1996Q1.

								
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