L19: Raising Rivals' Costs and Predation

Question 1

where is this practice ocmmon?

Answer 1

industries with vertically integrated dominant firms

Question 2

raising he costs of a competitive fringe

Answer 2

common case where there is a single dominant firm like a monopoly with a competitive fringe

raising rivals’ costs is profitable as long as it is not ‘too costly’
- want to increase their own cost as long as it increases the cost of the fringe more
- makes all consumers worse off since prices go up and they produce less but dominant firm is better off

Question 3

input preemption

Answer 3

idea of capturing certain inputs

dominant firm has incentives to capture the inputs to deter entrance of the entrant

Question 4

predation and predatory pricing

Answer 4

idea that you are a dominant firm and want to deter entry so you let entrants enter but set prices low (below MC) and they lose money

another form of strategic behaviour

recoupment period needed to recover losses during predation

Question 5

Chicago critique

Answer 5

if predation is followed by recoupment, it induces entry again