October 3, 2008
Are Excessive Prices Really Self-Correcting?
Posted by D. Daniel Sokol
Ariel Ezrachi of University of Oxford's Faculty of Law and David Gilo of Tel Aviv University Law School have a fascinating new paper on Are Excessive Prices Really Self-Correcting?
ABSTRACT: Excessive pricing by a dominant firm is considered as one of the most blatant forms of abuse. Despite this, in many instances, competition authorities refrain from intervening against excessive prices. The non-interventionist approach is based, among others, on the premise that high prices encourage new entry and thereby should be feared less. According to this view, in many cases, excessive prices are likely to be competed away and make intervention redundant. The following paper questions this conventional view and reconsiders whether excessive prices are indeed self-correcting. It illustrates how in the majority of cases excessive prices will not attract new entry of viable competitors, whether entry barriers are high or low. Furthermore, it shows how at times the prohibition of excessive prices may encourage, rather than discourage, entry. By doing so the paper narrows and focuses the arguments against intervention. Accordingly, it concludes that if excessive pricing is not to be prohibited it should not be due to it being 'self-correcting' but rather for reasons such as the need to stimulate investment or difficulties of implementation, which should be assessed on a case by case basis.
October 3, 2008 | Permalink
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