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A Simple Theory of Predation

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  • Chiara Fumagalli
  • Massimo Motta

Abstract

We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterized by common costs. Conditions under which predation may (or not) take place in actual cases are also discussed.

Suggested Citation

  • Chiara Fumagalli & Massimo Motta, 2012. "A Simple Theory of Predation," Working Papers 437, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:437
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    Cited by:

    1. Patrick Rey & Yossi Spiegel & Konrad O. Stahl, 2022. "A Dynamic Model of Predation," CESifo Working Paper Series 9819, CESifo.
    2. 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.
    3. George Geronikolaou, 2015. "On the Effect of Market Share Dispersion on New Firm Entry," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 21(3), pages 287-298, August.
    4. Argenton, Cédric, 2019. "Colluding on excluding," European Economic Review, Elsevier, vol. 113(C), pages 194-206.
    5. Chiara Fumagalli & Massimo Motta, 2020. "Dynamic Vertical Foreclosure," Journal of Law and Economics, University of Chicago Press, vol. 63(4), pages 763-812.
    6. Amelio, Andrea & Giardino-Karlinger, Liliane & Valletti, Tommaso, 2020. "Exclusionary pricing in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    7. Liliane Karlinger & Dimitrios Magos & Pierre Régibeau & Hans Zenger, 2020. "Recent Developments at DG Competition: 2019/2020," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 783-814, December.
    8. Michael Funk & Christian Jaag, 2018. "The More Economic Approach To Predatory Pricing," Journal of Competition Law and Economics, Oxford University Press, vol. 14(2), pages 292-310.
    9. Walter Beckert & Paolo Siciliani, 2018. "Protecting vulnerable consumers in "switching markets"," IFS Working Papers W18/23, Institute for Fiscal Studies.
    10. Vasconcelos, Helder, 2015. "Is exclusionary pricing anticompetitive in two-sided markets?," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 1-10.
    11. Дзагурова Наталия Борисовна, 2016. "Направления Повышения Привлекательности Лотерей, Сопряженных С Осуществлением Кооперативных Специфических Инвестиций," Journal of Institutional Studies Journal of Institutional Studies (Журнал институциональных исследований), CyberLeninka;Общество с ограниченной ответственностью «Гуманитарные перспективы», vol. 8(4), pages 53-71.
    12. Walter Beckert & Paolo Siciliani, 2022. "Protecting Sticky Consumers in Essential Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 61(3), pages 247-278, November.
    13. Chiara Fumagalli & Massimo Motta, 2024. "Economic Principles for the Enforcement of Abuse of Dominance Provisions," Working Papers 1431, Barcelona School of Economics.
    14. C.-Philipp Heller & Heiner Lindenlaub & Frank P Maier-Rigaud, 2020. "Exclusionary bundle discounts: A simple model with two applications," Economics Bulletin, AccessEcon, vol. 40(1), pages 210-216.
    15. Dai Zusai, 2012. "Excess Liquidity against Predation," DETU Working Papers 1201, Department of Economics, Temple University.
    16. Rey, Patrick & Jullien, Bruno & Saavedra, Claudia, 2014. "The Economics of Margin Squeeze," CEPR Discussion Papers 9905, C.E.P.R. Discussion Papers.

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    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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