Working Paper: NBER ID: w5663
Authors: Fiona Scott Morton
Abstract: I examine the outcomes of cases of entry by merchant shipping lines into established markets around the turn of the century. These established markets are completely dominated by an incumbent cartel composed of several member shipping lines. The cartel makes the decision whether or not to begin a price war against the entrant; some entrants are formally admitted to the cartel without any conflict. I use characteristics of the entrant to predict whether or not the entrant will encounter a price war conditional on entering. I find that weaker entrants are fought, where weaker means less financial resources, experience, size, or poor trade conditions. The empirical results provide support for the long purse theory of predation. I discuss qualitative evidence such as predatory intent expressed in correspondence between cartel members which supports the empirical results. The results are also found to be robust to misclassification of the dependent variable which is a particular concern when dealing with historical data.
Keywords: predatory pricing; shipping cartels; industrial organization
JEL Codes: L41; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Characteristics of entrants (L26) | Likelihood of facing a price war (L11) |
| Weaker entrants (L13) | Likelihood of provoking a price war from the incumbent cartel (L12) |
| Younger firms with limited resources (L26) | Increased likelihood of facing predatory pricing strategies (L11) |
| Age and financial health of an entrant (L26) | Vulnerability to predation (Q22) |
| Presence of long-term contracts or government subsidies (L14) | Likelihood of predation (C92) |