Predatory Pricing: Rare Like a Unicorn?

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Handbook of Experimental Economics Results, 2008, 1, pp. 178 - 184
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Despite the discovery of predatory intent in several widely cited antitrust cases, mall~ industrial organization economists have argued that predatory pricing is irrational alld rarely observed. For example, one of our colleagues, Kenneth Elzinga, in an address hI the American Bar Association posed the question of whether predatory pricing is rim' like an old stamp or "rare like a unicorn." The argument is that pricing below cosl ill order to drive competitors out of the market will be irrational for two reasons: (I) tllCl'l' are more profitable ways (e.g., acquisitions) to eliminate competitors, and (2) fUllin." price increases will result in new entry. Decisions in antitrust cases have often resulted from documented predatory intcllL which is sometimes attributed to an "irrational" motive for management to elimin;th' rivals. In the absence of a "smoking gun," arguments turn on Areeda··-Turner cost-based tests, which are difficult to apply given the multi-product nature of most business OpCl" ations. For these reasons, the issue of predatory pricing is a natural topic for laboratory studies where costs are induced directly.
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