DP12125 Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies

Author(s): Aaron Edlin, Catherine Roux, Armin Schmutzler, Christian Thoeni
Publication Date: July 2017
Keyword(s): Antitrust Law, entry deterrence, Experiment ent, Firm Strategy, Predatory Pricing
JEL(s): C91, D21, K21, L12, L13
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12125

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.