Predatory Pricing

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					           Predatory Pricing
• Tension in the free-market model: Gain
  market share by lowering prices (low
  margin/high volume); “A/T laws protect
  competition not competitors”
  – So when does “healthy” competition (which
    includes survival of the fittest (i.e. most
    efficient)) become anticompetive? “Cutthroat”?
• Q.What would be objective of predatory
  pricer? A. To force loses on rival who
  would ultimately exit the market
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• Once rival(s) had left, Defendant would
  gain monopoly and could be a price-seeker
• Although “price wars” help consumers by
  driving down prices, at some price levels
  they can be very costly to the “warriors”
• If Defendant has sustained “red ink” to
  drive rival(s) out, it needs to “recoup”
  losses before reaping monopoly profits
  – Has capacity to capture departed rival’s share?
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• The “recoupment period” is critically
  dependent upon barriers to entry
  – Supranormal profits will induce repositioning
    of assets (i.e. entry of new rivals)
• Thus “red ink” pricing is irrational except to
  attempt to monopolize (or to protect an
  existing legitimate monopoly)
• How recognize “red ink”? Pricing below
  marginal cost
 Economics of Predatory Pricing
       (An Overview)
• Risk of “Type II” (false positive) Error
  – Trebel damage implications
• Marginal cost cannot be readily (or reliably)
• Areeda-Turner surrogate: av. Variable cost
• Robinson Patman Act and “primary line”
  price discrimination to stop geopraphic
  subsidation of predation (Lesson 28)
The Economics of Marginal Cost
• If price below marginal cost, lose money on
  every unit sold
• Concepts of fixed cost, variable cost, total
  cost, average variable cost
• Even AVC can be tricky to determine if
  modular capacity or if predatory price shifts
  demand curve to right
• Fully distributed cost v. incremental cost
• Regulated/non-reg. markets cost allocation
Possible Shorter-Term Strategies
• “Price disciplining” as a signal to others
  “under the umbrella”
• Distress inventory; liquidation sale; solving
  cash-crisis could all lead to non-predatory,
  temporary below-marginal-cost pricing

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