Sacrifice tests for predation in a dynamic pricing model

Ordover and Willig (1981) and Cabral and Riordan (1997) meet Ericson and Pakes (1995)

David Besanko, Ulrich Doraszelski*, Yaroslav Kryukov

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

To detect the presence of predatory pricing, antitrust authorities and courts routinely ask whether a firm sacrifices current profit in exchange for the expectation of higher future profit following the exit of its rival. Because predatory pricing is an inherently dynamic phenomenon, we show in this paper how to construct sacrifice tests for predatory pricing in a modern industry-dynamics framework along the lines of Ericson and Pakes (1995). In particular, we adapt the definitions of predation due to Ordover and Willig (1981) and Cabral and Riordan (1997) to this setting and construct the corresponding sacrifice tests.

Original languageEnglish (US)
Article number102522
JournalInternational Journal of Industrial Organization
DOIs
StatePublished - Jan 1 2019

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Profitability
Costs
Dynamic pricing
Predation
Predatory pricing
Industry
Profit
Exit
Authority
Industry dynamics

Keywords

  • Industry dynamics
  • Markov perfect equilibrium
  • Predatory pricing
  • Sacrifice tests

ASJC Scopus subject areas

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

Cite this

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abstract = "To detect the presence of predatory pricing, antitrust authorities and courts routinely ask whether a firm sacrifices current profit in exchange for the expectation of higher future profit following the exit of its rival. Because predatory pricing is an inherently dynamic phenomenon, we show in this paper how to construct sacrifice tests for predatory pricing in a modern industry-dynamics framework along the lines of Ericson and Pakes (1995). In particular, we adapt the definitions of predation due to Ordover and Willig (1981) and Cabral and Riordan (1997) to this setting and construct the corresponding sacrifice tests.",
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AU - Kryukov, Yaroslav

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AB - To detect the presence of predatory pricing, antitrust authorities and courts routinely ask whether a firm sacrifices current profit in exchange for the expectation of higher future profit following the exit of its rival. Because predatory pricing is an inherently dynamic phenomenon, we show in this paper how to construct sacrifice tests for predatory pricing in a modern industry-dynamics framework along the lines of Ericson and Pakes (1995). In particular, we adapt the definitions of predation due to Ordover and Willig (1981) and Cabral and Riordan (1997) to this setting and construct the corresponding sacrifice tests.

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