Friday, August 25, 2017

Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies

Aaron Edlin, University of California, Berkeley, Catherine Roux, University of Basel, Armin Schmutzler, University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR), and Christian Thöni, University of Lausanne ask Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies.

ABSTRACT: 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.

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