Predation Under Perfect Information

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Abstract

In an oligopoly configuration characterized by high barriers to (re-)entry, a finite horizon, perfect information about demand and costs and the presence of three identical firms, we show that two of them (the predators) can choose to charge an initial price that is so low that the third (the prey) decides to exit immediately, after which the predators can enjoy higher profits, even if they do not raise their price. Predatory prices are thus observed on the equilibrium path and the predators end up earning more than in the best Bertrand (or even, collusive) equilibrium with three firms.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages17
Volume2010-26
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-26

Keywords

  • predation
  • predatory pricing
  • collusion
  • dynamic game
  • Bertrand competition

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