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A Policy to Prevent Rational Test-Market Predation

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  • David Scharfstein

Abstract

This article models the problem of designing predation policy as one of structuring incentives so that firms choose not to practice predation but to engage in nonpredatory competition. The government decides how intensively to search for possible predatory incidents, how thoroughly to investigate each incident, and how much to penalize convicted predators. We consider test-market "bluffing" predation in which incumbents with high costs can deter entry into a national market by pretending to have low costs. If fines are merely transfers, the optimal fine is the largest one that is feasible. Furthermore, the government should avoid injunctions against "continued predatory pricing."

Suggested Citation

  • David Scharfstein, 1984. "A Policy to Prevent Rational Test-Market Predation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 229-243, Summer.
    • Handle: RePEc:rje:randje:v:15:y:1984:i:summer:p:229-243
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    Cited by:

    1. Rafael Rocha Oliveira & Claudio Lucinda, 2024. "How do incumbents react to the exit of a potential competitor? Evidence from the airline sector," Working Papers, Department of Economics 2024_04, University of São Paulo (FEA-USP).
    2. Argenton, C., 2010. "Predation Under Perfect Information," Other publications TiSEM c64644e5-2aae-4e41-9a47-a, Tilburg University, School of Economics and Management.
    3. Aldo González Tissinetti, 2006. "Antitrust and Regulation, Complements or Substitutes? The Case of a Vertically Integrated Firm," Working Papers wp225, University of Chile, Department of Economics.
    4. Ritelli, Daniele & Barbiroli, Giancarlo & Fabbri, Paolo, 1997. "Predation among technologies on the market: A modellistic analysis," Journal of Mathematical Economics, Elsevier, vol. 27(3), pages 347-374, April.
    5. Bernard, Darren, 2016. "Is the risk of product market predation a cost of disclosure?," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 305-325.

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