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Predation and the Logic of the Average Variable Cost Test

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  • Baumol, William J

Abstract

This article explores principles for execution of the widely accepted Areeda-Turner test of predatory pricing. Defining an Areeda-Turner price as one that does not threaten to exclude any more-efficient supplier, I conclude that (1) any individual price that is not below average avoidable cost cannot be predatory; (2) thus, average avoidable cost, not marginal cost, is crucial in testing predation; (3) sets of prices of different products of the firm can violate the test if the revenues of any combinations of the firm's products fall short of the combined avoidable costs of those products; and (4) a firm's failure to maximize its profits during some relatively brief period is not by itself legitimate evidence of predation. Copyright 1996 by the University of Chicago.

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  • Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
    • Handle: RePEc:ucp:jlawec:v:39:y:1996:i:1:p:49-72
    DOI: 10.1086/467343
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    1. J. Gregory Sidak & William Baumol, 1994. "Toward Competition in Local Telephony," Books, American Enterprise Institute, number 52984, September.
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    Cited by:

    1. Lindsey, Robin & West, Douglas S., 2003. "Predatory pricing in differentiated products retail markets," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 551-592, April.
    2. Colombo, Stefano, 2009. "On the effects of selective below-cost pricing in a vertical differentiation model," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-13.
    3. Hern, R., 2001. "Competition and access pricing in the UK water industry," Utilities Policy, Elsevier, vol. 10(3-4), pages 117-127.
    4. Török, Ádám, 2011. "A dominanciaproblémák tényeinek értelmezése és a közgazdaság-tudományi módszertan [Interpretation of the facts of dominance problems and the methodology of economics]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 41-55.
    5. Pietro Crocioni, 2018. "On The Relevant Cost Standard For Price–Cost Test In Abuses Of Dominance," Journal of Competition Law and Economics, Oxford University Press, vol. 14(2), pages 262-291.
    6. Budzinski Oliver & Köhler Karoline Henrike, 2015. "Is Amazon The Next Google?," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 66(1), pages 263-288, January.
    7. Brunekreeft, G. & van Damme, E.E.C. & Larouche, P. & Sorana, V., 2006. "On the Law and economics of price squeeze in telecommunications markets," Other publications TiSEM 2f300d44-7100-4e54-a6a3-8, Tilburg University, School of Economics and Management.
    8. Mohr Jochen, 2018. "Wettbewerbsrecht und Ökonomie im digitalen 21. Jahrhundert: Zugleich ein Beitrag zur Intel-Entscheidung des Europäischen Gerichtshofs und zum Facebook-Verfahren des Bundeskartellamts," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 69(1), pages 259-308, July.
    9. Michael Katz, 2002. "Recent Antitrust Enforcement Actions by the U.S. Department of Justice: A Selective Survey of Economic Issues," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 21(4), pages 373-397, December.
    10. Kalevi Dieke, Alex & Junk, Petra & Thiele, Sonja & Zauner, Martin, 2012. "Kostenstandards in der Ex-Post-Preiskontrolle im Postmarkt," WIK Discussion Papers 368, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    11. Herbert Hovenkamp, 2015. "The Areeda–Turner Test for Exclusionary Pricing: A Critical Journal," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 46(3), pages 209-228, May.
    12. Sveinn Vidar Gudmundsson, 2011. "Liberalization of Air Transport," Chapters, in: Matthias Finger & Rolf W. Künneke (ed.), International Handbook of Network Industries, chapter 14, Edward Elgar Publishing.
    13. Edlin, Aaron S. & Farrell, Joseph, 2002. "The American Airlines Case: A Chance to Clarify Predation Policy," Department of Economics, Working Paper Series qt0wx7c4zf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    14. Mark L. Burton & David L. Kaserman & John W. Mayo, 2009. "Common Costs And Cross‐Subsidies: Misestimation Versus Misallocation," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 193-199, April.
    15. Kai Hüschelrath & Jürgen Weigand, 2013. "Predation enforcement options: an evaluation in a Cournot framework," European Journal of Law and Economics, Springer, vol. 35(2), pages 241-272, April.
    16. Török, Ádám, 2009. "Társadalomtudományi tények és természettudományos módszerek [Social scientific facts and natural scientific techniques]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1067-1087.
    17. Valentiny, Pál, 2004. "Árprés és felfaló árazás. Közgazdasági elmélet, bírói, szabályozói gyakorlat [Price squeezing and predatory pricing. Economic theory and judicial and regulatory practice]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 24-45.
    18. Morrison, William G., 2004. "Dimensions of predatory pricing in air travel markets," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 87-95.
    19. Christian Genthon, 2007. "Can we measure Microsoft's market power ?," Post-Print halshs-00153837, HAL.

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