Sacrifice tests for predation in a dynamic pricing model: Ordover & Willig (1981) and Cabral & Riordan (1997) meet Ericson & Pakes (1995)

Besanko David, Doraszelski Ulrich and Kryukov Yaroslav

No 2014-E2, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: To detect the presence of predatory pricing, antitrust authorities 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 & Pakes (1995). In particular, we adapt the definitions of predation due to Ordover & Willig (1981) and Cabral & Riordan (1997) to this setting and construct the corresponding sacrifice tests.

Date: 2013-10
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