The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Predatory Pricing

  • Janusz A. Ordover
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1778

Abstract

Predatory pricing is a response to a rival that sacrifices part of the profit that could be earned under competitive circumstances were the rival to remain viable, in order to lessen competition and gain consequent monopoly profit. The presence of intertemporal cost and/or demand linkages as well as network effects complicates the formulation of pricing rules that would distinguish legitimate from exclusionary pricing behaviour, and suggests that standard (non-strategic)  models of markets do not necessarily offer much help in gauging the rationality of predation.

Keywords

Above-cost pricing Antitrust policies Barriers to entry Chain-store paradox Entry Exit Incomplete information Increasing returns Intertemporal scope economies Marginal and average cost pricing Natural monopoly Network goods Predatory pricing Returns to scale Standardization Two-sided platforms 

JEL-Classifications

D4 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Areeda, P.E., and H. Hovenkamp. 1986. Antitrust law: 1986 supplement. Boston: Little, Brown.Google Scholar
  2. Areeda, P.E., and H. Hovenkamp. 1993. Antitrust law (supplement). Boston: Little, Brown.Google Scholar
  3. Areeda, P.E., and D.F. Turner. 1975. Predatory pricing and related practices under section 2 of the Sherman Act. Harvard Law Review 88: 697–733.CrossRefGoogle Scholar
  4. Areeda, P.E., and D.F. Turner. 1978. Antitrust law. Boston: Little Brown.Google Scholar
  5. Armstrong, M. 2007. Two-sided markets: Economic theory and policy implications. In Recent developments in antitrust, ed. J.P. Choi. Cambridge, MA: MIT Press.Google Scholar
  6. Baker, J.B. 1994. Predatory pricing after Brooke Group: An economic perspective. Antitrust Law Journal 64: 585–604.Google Scholar
  7. Baumol, W.J. 1979. Quasi-permanence of price reductions: A policy for prevention of predatory pricing. The Yale Law Journal 89: 1–26.CrossRefGoogle Scholar
  8. Baumol, W.J. 1996. Predation and the logic of the average variable cost test. Journal of Law and Economics 39: 49–72.CrossRefGoogle Scholar
  9. Baumol, W.J., J.C. Panzar, and R.D. Willig. 1982. Contestable markets and the theory of industry structure. New York: Harcourt, Brace Jovanovich.Google Scholar
  10. Baumol, W.J., and J.G. Sidak. 1994. Toward competition in local telephony. Cambridge, MA: MIT Press.Google Scholar
  11. Benoit, J.P. 1984. Financially constrained entry in a game with incomplete information. RAND Journal of Economics 15: 490–499.CrossRefGoogle Scholar
  12. Bolton, P., J.F. Brodley, and M.H. Riordan. 2000. Predatory pricing: Strategic theory and legal policy. Georgetown Law Journal 88: 2239–2330.Google Scholar
  13. Bolton, P., and D. Scharfstein. 1990. A theory of predation based on agency problems in financial contracting. American Economic Review 80: 93–106.Google Scholar
  14. Bork, R. 1978. Antitrust paradox. New York: Basic Books.Google Scholar
  15. Brodley, J.F., P. Bolton, and M.H. Riordan. 2000. Predatory pricing: Strategic theory and legal policy. Georgetown Law Journal 88: 2239.Google Scholar
  16. Brooke Group Led v. Brown & Williamson Tobacco Corp, 113 S Ct. 2578 (1993).Google Scholar
  17. Burns, M.R. 1986. Predatory pricing and the acquisition cost of competitors. Journal of Political Economy 94: 266–296.CrossRefGoogle Scholar
  18. Cabral, L.M.B., and M.H. Riordan. 1994. The learning curve, market dominance, and predatory pricing. Econometrica 62: 115–140.CrossRefGoogle Scholar
  19. Comanor, W.S., and H.E. Frech III. 1984. Strategic behavior and antitrust analysis. American Economic Review 74: 372–376.Google Scholar
  20. Denger, M.L., and J.A. Herfort. 1994. Predatory pricing claims after Brooke Group. Antitrust Law Journal 62: 541–558.Google Scholar
  21. Easley, D., R.T. Masson, and R.J. Reynolds. 1985. Preying for time. Journal of Industrial Organization 33: 445–460.Google Scholar
  22. Easterbrook, F.H. 1981. Predatory strategies and counterstrategies. University of Chicago Law Review 48: 263–337.CrossRefGoogle Scholar
  23. Easterbrook, F.H. 1984. The limits of antitrust. Texas Law Review 63: 1–40.Google Scholar
  24. Edlin, A. 2002. Stopping above-cost predatory pricing. The Yale Law Journal 111: 941–991.CrossRefGoogle Scholar
  25. Edlin, A., and J. Farrell. 2004. The American airlines case: A chance to clarify predation policy. In The antitrust revolution, ed. J.E. Kwoka Jr. and L.J. White, 4th ed. Oxford: Oxford University Press.Google Scholar
  26. Elhauge, E. 2003. Why above-cost price cuts to drive out entrants are not predatory: And the implications for defining costs and market power. The Yale Law Journal 112: 681–827.CrossRefGoogle Scholar
  27. Elzinga, K.G., and D.E. Mills. 1994. Trumping the Areeda–Turner test the recoupment standard in Brooke Group. Antitrust Law Journal 62: 559–584.Google Scholar
  28. Evans, D.S., and R. Schmalensee. 2002. Some economic aspects of antitrust analysis in dynamically competitive industries. In Innovation policy and the economy, ed. A.B.. Jae, J. Lerner, and S. Stern, vol. 2. Cambridge, MA: NBER and MIT Press.Google Scholar
  29. Farrell, J., and M. Katz. 2005. Competition or predation? Consumer coordination, strategic pricing and price floors in network markets. Journal of Industrial Economics 53: 203–231.CrossRefGoogle Scholar
  30. Fudenberg, D., and J. Tirole. 1986. A ‘signal-jamming’ theory of predation. RAND Journal of Economics 17: 366–376.CrossRefGoogle Scholar
  31. Genesove, D., and W. Mullin. 2006. Predation and its rate of return: The sugar industry, 1887–1914. RAND Journal of Economics 17: 366–376.Google Scholar
  32. Granitz, E., and B. Klein. 1996. Monopolization by ‘raising rivals’ costs’: The standard oil case. Journal of Law and Economics 39: 1–47.CrossRefGoogle Scholar
  33. Green, W., and J.A. Ordover. 1996. Predatory pricing . Chicago: American Bar Association.Monograph No. 22Google Scholar
  34. Green, W., et al. 1996. Predatory pricing. Chicago: American Bar Association.Google Scholar
  35. Hemphil, S. 2001. Note, the role of recoupment in predatory pricing analysis. Stanford Law Review 53: 1581–1612.CrossRefGoogle Scholar
  36. Joskow, P.L., and A.K. Klevorick. 1979. A framework for analyzing predatory pricing policy. The Yale Law Journal 89: 213–270.CrossRefGoogle Scholar
  37. Kreps, D., P. Milgrom, J. Roberts, and R. Wilson. 1982. Rational cooperation in the finitely-repeated Prisoner’s Dilemma. Journal of Economic Theory 27: 245–252.CrossRefGoogle Scholar
  38. Kreps, D., and R. Wilson. 1982. Reputation and imperfect information. Journal of Economic Theory 27: 253–279.CrossRefGoogle Scholar
  39. Lott, J. Jr. 1999. Are predatory commitments credible? Chicago: University of Chicago Press.Google Scholar
  40. Marx, L.M., and G. Shaffer. 1999. Predatory accommodation: Below-cost pricing without exclusion in intermediate goods markets. RAND Journal of Economics 30: 22–43.CrossRefGoogle Scholar
  41. McGee, J. 1958. Predatory price cutting: The Standard Oil (NJ) case. Journal of Law and Economics 1: 137–169.CrossRefGoogle Scholar
  42. McGee, J. 1980. Predatory pricing revisited. Journal of Law and Economics 23: 289–330.CrossRefGoogle Scholar
  43. Milgrom, P., and J. Roberts. 1982a. Limit pricing and entry under incomplete information: An equilibrium analysis. Econometrica 50: 443–459.CrossRefGoogle Scholar
  44. Milgrom, P., and J. Roberts. 1982b. Predation, reputation and entry deterrence. Journal of Economic Theory 27: 280–312.CrossRefGoogle Scholar
  45. Milgrom, P., and J. Roberts. 1990. The new theories of predatory pricing. In Industrial structure in the new industrial economics, ed. G. Bonnano and D. Brandolini. Oxford: Clarendon Press.Google Scholar
  46. Elzinga, K.G., and D.E. Mills. 2001. Predatory pricing and strategic theory. Georgetown Law Journal 89: 2475–2493.Google Scholar
  47. Ordover, J.A., and G. Saloner. 1989. Predation, monopolization and antitrust. In Handbook of industrial organization, ed. R. Schmalensee and R.D. Willig. New York: North-Holland.Google Scholar
  48. Ordover, J.A., and R.D. Willig. 1981. An economic definition of predation: Pricing and product innovation. The Yale Law Journal 91: 8–53.CrossRefGoogle Scholar
  49. Ordover, J.A., and R.D. Willig. 1995. Economists’ view: The Department of Justice draft guidelines for the licensing and acquisition of intellectual property. Antitrust Magazine 9: 29–36.Google Scholar
  50. Phlips, L. 1995. Competition policy: A game-theoretic perspective. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  51. Posner, R. 1976. Predatory pricing. In Antitrust law: An economic perspective, ed. R. Posner. Chicago: University of Chicago Press.Google Scholar
  52. Rasmusen, E. 1985. Entry for buyout. Working paper, Graduate School of Management, UCLA.Google Scholar
  53. Roberts, J. 1986. A signalling model of predatory pricing. Oxford Economic Papers (Suppl.) NS 38: 75–93.CrossRefGoogle Scholar
  54. Rochet, J-Ch., and J. Tirole. 2003. Platform competition in two-sided markets. Journal of the European Economic Association 1: 990–1029.CrossRefGoogle Scholar
  55. Rochet, J-Ch., and J. Tirole. 2006. Two-sided markets: A progress report. RAND Journal of Economics 21: 172–187.Google Scholar
  56. Saloner, G. 1987. Predation, mergers and incomplete information. RAND Journal of Economics 18: 165–186.CrossRefGoogle Scholar
  57. Salop, S.C. and Shapiro, C. 1980. A guide to test market predation. Working paper, Federal Trade Commission, Bureau of Economics.Google Scholar
  58. Scharfstein, O. 1984. A policy to prevent rational test-market predation. RAND Journal of Economics 15: 229–243.CrossRefGoogle Scholar
  59. Scherer, F.M. 1970. Industrial markets structure and economic performance. Chicago: Rand McNally; 2nd edn, 1980.Google Scholar
  60. Scherer, F.M. 1976. Predatory pricing and the Sherman Act: A comment. Harvard Law Review 89: 869–890.CrossRefGoogle Scholar
  61. Selten, R. 1978. The chain-store paradox. Theory and Decision 9: 127–159.CrossRefGoogle Scholar
  62. Standard Oil Co. of New Jersey v. US, 221 US 1 (1911).Google Scholar
  63. Telser, L.G. 1966. Cutthroat competition and the long purse. Journal of Law and Economics 9: 259–277.CrossRefGoogle Scholar
  64. Von Hohenbalken, B., and D. West. 1984. Predation among supermarkets: An algorithmic locational analysis. Journal of Urban Economics 15: 244–257.CrossRefGoogle Scholar
  65. Von Hohenbalken, B., and D. West. 1986. Empirical tests for predatory reputation. Canadian Journal of Economics 19: 160–178.CrossRefGoogle Scholar
  66. Weiman, D., and R. Levin. 1994. Preying for monopoly? The case of Southern Bell Telephone Company, 1894–1912. Journal of Political Economy 102: 103–126.CrossRefGoogle Scholar
  67. West, D., and B. Van Hohenbalken. 1984. Spatial predation in a Canadian retail oligopoly. Journal of Regional Science 24: 415–429.CrossRefGoogle Scholar
  68. Williamson, O.E. 1977. Predatory pricing: A strategic and welfare analysis. The Yale Law Journal 87: 284–340.CrossRefGoogle Scholar
  69. Zerbe, R. Jr., and M. Mumford. 1996. Does predatory pricing exist? Economic theory and the courts after Brooke Group. Antitrust Bulletin 41: 949–985.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Janusz A. Ordover
    • 1
  1. 1.