Discussion paper
DP12125 Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies
We study the anti-competitive 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.
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