Working Paper: CEPR ID: DP7372
Authors: Chiara Fumagalli; Massimo Motta
Abstract: We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.
Keywords: anticompetitive behaviour; antitrust; below-cost pricing; exclusion
JEL Codes: K21; L12; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incumbent's Pricing Strategy (D49) | Entrant's Profitability (D22) |
| Scale Economies (F12) | Entrant's Profitability (D22) |
| Predatory Pricing Behavior (L11) | Incumbent's Future Monopoly Profits (D42) |
| Market Dynamics (D49) | Likelihood of Predation (C92) |