COMPETITION OR PREDATION? CONSUMER COORDINATION, STRATEGIC PRICING AND PRICE FLOORS IN NETWORK MARKETS*

Joseph Farrell () and Michael Katz ()

Journal of Industrial Economics, 2005, vol. 53, issue 2, 203-231

Abstract: Although network effects can make predation more likely to succeed, we find that the leading anti‐predation rules may lower or raise efficiency and consumer welfare in network markets. We find that: (a) the extensive debates about the ‘correct’ measure of cost on which to base price floors are unlikely to be productive; (b) the Ordover‐Willig rule that is widely thought to be correct in theory but difficult to apply in practice is, in fact, incorrect in theory; and (c) efficient price floors would have to depend on consumer expectations and coordination processes that are unlikely to be observable in practice.

Date: 2005
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