Predatory pricing definition economics. Predatory Pricing 2018-12-27

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Oligopoly

predatory pricing definition economics

Predatory intent was easily established. The consensus to which the Court referred rested essentially on empirical studies by John McGee and Roland Koller, published in 1958 and 1969; and the Court cited each work explicitly. The study of the economics of global manufacturing, for example, is of constant debate in the financial and political spheres. Indeed, the acquisition agreement would probably require the prey to release all claims against the predator. Discriminatory price cutting by a large interstate seller which injured a local rival, accompanied by predatory intent was virtually per se unlawful. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare.


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Definition of Predatory Pricing

predatory pricing definition economics

These are very general effects arising in almost any situation where there is a possibility of future entry. Considering all the above components, it is more improbable that contestant will seek after savage practices. In all circuits cost determination remained a source of continuing difficulty, however. We discuss the four elements necessary to make out a prima facie case of predatory pricing in this section, and the efficiencies defense in a separate section. The risks of over deterrence in such a case seem minimal since the Supreme Court has made clear that the standard of proof in predatory pricing cases is exacting, and the post- Brooke cases show that it is exceedingly difficult to satisfy that standard, absent a persuasive theory of predation.

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Predatory Pricing: Strategic Theory And Legal Policy

predatory pricing definition economics

Moreover, because of its self-serving nature, even contemporaneous documents prepared by the victim might be biased, designed to influence possible future litigation. Evidence tending to prove knowing adoption includes: 1 proof of a corporate plan to engage in reputation predation, 2 publicizing or disseminating information likely to induce a reputation effect, such as information showing failure of new entry in a particular sub-market due to price cutting by the predator, 3 suppression of information that might reveal bluffing by the predator, for example the payment of large amounts to settle a predatory pricing suit particularly if the settlement amount is secret , or to acquire a complaining victim in the demonstration market, and, perhaps most importantly, 4 repetition of the predatory action in multiple markets or over successive time periods, which strengthens the competition-reducing belief the predator seeks to induce. Despite these problems, a cost benchmark is generally necessary for effective business planning for an activity as ubiquitous as pricing. Proof of such facts would tend to establish that below-cost pricing was necessary to induce the savings in production cost. Plaintiff could still bring a case without advancing modern strategic theory. School of Management, New Zealand Institute for Antitrust Law and Economics, Princeton University, and Tilburg University Centre for Economic Research.

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TRAI: TDSAT junks Trai's predatory pricing order

predatory pricing definition economics

While there was some coordination of entry by independent telephone companies into individual cities, entry did not occur simultaneously, but over time, dependent on the action of local groups. The use of bogus independents probably reduced the costs of acquisition. Indeed, the lending contract that minimizes agency problems will maximize the incentive to prey. In most general terms predatory pricing is defined in economic terms as a price reduction that is profitable only because of the added market power the predator gains from eliminating, disciplining or otherwise inhibiting the competitive conduct of a rival or potential rival. Indeed, for the existing rival the prospect of continued competition with the predator is likely to be even less attractive than in the simple cost signaling case. Nor can new creditors rely on the bankruptcy court to effectively constrain agency misconduct by the bankrupt debtor. Surely not the predator, who would have no desire to scuttle the transaction.

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predatory economy

predatory pricing definition economics

An entrant is trying to decide whether to launch a new product to compete with an established brand. We discuss reputational barriers in Part V below. Thus, it is almost unlikely that entrant will opt for predatory pricing. In many instances lenders commit explicitly to further financing, contingent on verifiable performance as in venture capital contracts , but more commonly the agreement to extend additional financing is implicit. Instead the assets will be sold in a wider market, perhaps national or international in scope. Firm A also induces a small number of service stations to buy the necessary equipment and train personnel. However, when the test market alone is subject to secret discounting, the victim may have difficulty in probing market demand precisely, and may therefore decline to enter the market.

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Predatory Pricing

predatory pricing definition economics

Similarly, in Traffic Scan Network, Inc. The idea here is that it would not be rational for the predator to take losses in the last market the prey enters because at that point the predator has no future reputation to maintain; so the prey would not be deterred from entering the last market. Indeed, these theories only require that managers act in the interest of shareholders, when there is separation of ownership and control. As such, an economist might be interested in performing a discounted cash flow analysis of a power plant project. The investors did not attempt to draw on their line of credit, but instead abandoned efforts to extend the system, despite their sunk investment. These limitations inhibit the fund manager from attempting to defeat a predatory strategy by buttressing the prey with additional funds when its performance is poor. The anticompetitive effects of predatory pricing are higher prices and reduced output including reduced innovation , achieved through the exclusion of a rival or potential rival.

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Economics A

predatory pricing definition economics

Translation memories are created by human, but computer aligned, which might cause mistakes. The Supreme Court has emphasized that proof of predatory pricing requires proof that entry and reentry barriers continue to exist during the recoupment period. Indeed, an internal memorandum from the incumbent's files assesses the entrant's financial resources, focussing on the net worth of its two principals, comparing this with the resources of a previous entrant who had also abandoned the market after severe price cutting by incumbent. With such evidence of actual recoupment already in progress, it seems reasonable to infer a coherent predatory strategy without requiring the plaintiff to completely spell out and prove the logic of the strategy. The victim knows that if it leaves the market, it can pursue other investment options. In addition, the period of below-cost pricing must be no longer than reasonably necessary to achieve the learning economies. The second attempted to assess strategic conduct directly, relying on multiple criteria, including but not limited to cost.

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Predatory Pricing

predatory pricing definition economics

The deep pocket theory in its original form held that a richly endowed predator would charge low prices to drive out a poorly endowed rival. For the same reasons the incumbent will also have greater access to outside funding. The rationale is similar to learning-by-doing because demand depends on cumulative sales. The substitution of a gross revenue or output measure for the traditional cost test may be justified because the special characteristics of airline markets makes output expansion a particularly effective predatory strategy. The empirical study is described in the earlier 1982 article, but the fact that the data contradict the Koller study was not made explicit until the recent 1996 article, and probably for that reason has been neglected in the legal literature. Interestingly, the number of reported cases declined in the latter period, perhaps indicating greater selectivity by counsel in cases tried. But in the first case — where there is a cost breakthrough — exit is economically desirable, while in the second — where no cost breakthrough occurs — exit harms consumers and reduces economic welfare.

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Predatory Pricing and Limit Pricing

predatory pricing definition economics

But such defense would not apply if the incumbent had pursued a deliberate strategy of investing ahead of demand to deter entry. Falling within the first category were the Williamson output increase rule and the Baumol price reversal rule. Therefore, we would limit antitrust enforcement to cases where the reputation effect augments or intensifies another, more concrete predatory program. Developing the strategic approach to predatory pricing, economists have formulated several coherent theories. This has reflected different ideas about what constitutes a monopoly and, where there is one, what sorts of behaviour are abusive. Nor did the deception stop at this point. Winston, the district court rejected a reputation effect argument not because it was implausible, but because market conditions would have prevented such an effect.

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