ECON 305 Lecture Notes - Lecture 13: Predatory Pricing, Market Power, Prokaryotic Small Ribosomal Subunit
11 Dec 2014
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Definition: predatory pricing is defined as pricing below cost to drive competitors out of the market or deter potential entrants. Requirements: market power, a prey, an inter-temporal sacrifice of profits. P < ac ; p < smc; p < avc. If you look at the diagram, the predator has huge losses compared to the prey. Under these circumstances, predation will not succeed because. By lowering output, rival firm minimizes losses. If the entrant believes the threat, he can avoid it by: Proposing a merger with the incumbent if it forms a monopoly it" s illegal. Contracts with buyers to set the price in advance of entry. Buyers will be willing to do so if the price is below the incumbent"s monopoly price. Minimize output and redeploy it in another market in periods of predation and come back after. The advantage could be the reputation of being low-cost given its price history even if it charges a high-price.
