Output Fluctuations as Entry Deterrence: A Model of Predatory Pricing

Leslie Young and Ali Bolbol

Canadian Journal of Economics, 1992, vol. 25, issue 1, 89-110

Abstract: If producers cannot borrow to smooth consumption, then an industry's dominant producer might engineer output fluctuations to deter entry, even when he has the same aversion to income fluctuations as fringe producers. If all producers can borrow at the same fixed rate of interest, then the dominant producer would keep output stationary. If the marginal cost of loans increases with the loan, then output fluctuations can benefit the dominant producer, even when all producers have the same cost schedule for loans and aversion to income fluctuations. The consumer can be better-off under this policy than if output fluctuations were prohibited.

Date: 1992
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