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The economics of predation: What drives pricing when there is learning-by-doing?

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Predatory pricing - a deliberate strategy of pricing aggressively in order to eliminate competitors - is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterizes predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We show that we can isolate and measure a firm's predatory incentives by decomposing the equilibrium pricing condition. Our decomposition maps into existing economic definitions of predation and provides us with a coherent and flexible way to develop alternative characterizations of a firm's predatory incentives. We ask three interrelated questions. First, when does predation-like behavior arise? Second, what drives pricing and, in particular, how can we separate predatory incentives for pricing aggressively from efficiency-enhancing incentives for pricing aggressively in order to move further down the learning curve? Third, what is the impact of predatory incentives on industry structure, conduct, and performance?

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  • Yaroslav Kryukov & Ulrich Doraszelski & David Besanko, "undated". "The economics of predation: What drives pricing when there is learning-by-doing?," GSIA Working Papers 2011-E30, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:-878519102
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