Predatory Pricing
Law and Economics-Charles W. Upton
Predatory Pricing
Other Issues
•
•
•
•
•
Predatory Pricing
Refusal to Deal
Tie-in
Mergers
Cartels
Predatory Pricing
Predatory Pricing
• Acme Widgets can produce widgets at a
marginal cost of $10.
• It currently sells them at $20 (it has a
monopoly).
• If someone begins to compete with Acme, it
will lower the price to $5 until that
competitor leaves the business.
Predatory Pricing
Predatory Pricing
• Acme Widgets can produce widgets at a
marginal cost of $10.
This
• It currently sells
themsounds
at $20 (itlike
has a
monopoly).predatory pricing and
not socially
efficient.
• If someone begins
to compete
with Acme, it
will lower the price to $5 until that
competitor leaves the business.
Predatory Pricing
Predatory Pricing
• An airline charges a high price for a route
where it has a monopoly.
• A discount airline enters the market.
• Can the original airline lower its price? Or
is that predatory pricing?
Predatory Pricing
The Areda-Turner Test
Predatory Pricing
The Areda-Turner Test
An example: Microsoft
charged firms one price
if they install Windows
on only some of their
computers. It charged a
lower price if they put
Windows on all
computers.
Predatory Pricing
The Areda-Turner Test
An example: Microsoft
Price
charged firms one price
Per
if they Windows on only
Units Unit
some of their computers.
8
50
It charged a lower price
9
40
if they put Windows on
10
30
all computers.
Predatory Pricing
TR
400
360
300
MR
-40
-60
The Areda-Turner Test
An example: Microsoft
charged firms one price
if they Windows on only
some of their computers.
It charged a lower price
if they put Windows on
all computers.
Predatory Pricing
TR
MR
The Areda-Turner Test
An example: Microsoft
When a firm put Windows
charged
firms
one
price
on all its computers,
if they Windows
on only
Microsoft
was essentially
some of in
their
operating
the computers.
range of a
It charged
lower
price
negative
MR. aThat
makes
economic
sense. on
if no
they
put Windows
all computers.
Predatory Pricing
TR
MR
The Areda-Turner Test
Consider the problems of
Anti-Windows,
a new
An example:
Microsoft
When software
a firm putsystem.
Windows
If it
charged
firms
one
price
TR
on all
its computers,
wants
to sell to the
if they Windows
on only
Microsoft
was
essentially
customer, the price is the
somecost
of in
their
computers.
operating
range of a
ofthe
Anti-Windows
MR
It charged
lower
price
negative
makes
plusMR.
theaThat
extra
cost
of
economic
sense.
if no
they
put Windows
onof
installing
fewer
copies
This is
allWindows.
computers.
predatory pricing.
Predatory Pricing
End
©2004 Charles
W. Upton
Predatory Pricing