产业组织理论授课课件-IO-slides-predatory.ppt

1、Predatory Conduct What is predatory conduct?Any strategy designed specifically to deter rival firms from competing in a market.Primary objective of predatory conduct is to influence the behavior of rivals.For an action to be seen as“predatory”it must only be profitable if it causes rival to exit mar

2、ket or deters a potential entrant.Review of Dominant Firm and Competitive Fringe Model One dominant firm in the industry.Acts as a price maker.Large number of small firms,the“competitive fringe”.Act as price takers.Dominants firm moves first and sets the price.Fringe firms supply based on the price.

3、Similar to Stackelberg,except followers dont affect price.Dominant firms demand is:DD(P)=D(P)-n*S(P)Industry QuantityPriceN*S(P)=Fringe SupplyD(P)At prices above this point,fringe supplies everythingDD(P)Dominant firm maximizes:P*DD(P)-cD(DD(P).Sets MR=MCIndustry QuantityPriceN*S(P)=Fringe SupplyD(P

4、)DD(P)MRD(P)MCDqD Fringe supplies based on price set by dominant firm.Industry QuantityPriceN*S(P)=Fringe SupplyD(P)DD(P)MRD(P)MCDqDP*qFImplications of Dominant Firm and Competitive Fringe Model Dominant firm supplies where MRD=MCD.In some cases this is greater than quantity monopolist would supply,

5、and in some cases less.Price will always be less than monopolists price would be.Why?Because competitive fringe serves to make dominant firms demand more elastic,so the firm has less power to price above marginal cost.Note that the dominant firm does not drive the fringe out of the market in this mo

6、del.Repeated Version Dominant Firm and Competitive Fringe Model What if there was more than one period?Dominant firm could kill competitive fringe by pricing so low that fringe would not produce.In a one-shot game,generally doesnt maximize current profits,and therefore not done.Once fringe dies,domi

7、nant firm can price at monopoly level.Profitability of plan depends on cost of killing fringe and relative size of monopoly profits.Summary of Limit Pricing and Quantity Commitment Model Incumbent in the market acts as a Stackelberg leader and chooses an output level.Potential entrant sees incumbent

8、s quantity and then decides whether to enter.Key assumption:entrant believes that its entry decision will not affect the leaders output choice.By picking output level,incumbent can manipulate potential entrants profit from entry.Industry QuantityPriceD(P)Residual demand for PEqLIndustry QuantityPric

9、eD(P)MCPEATCPEqLDPEMRPEq*At q*,entrants profit is negativeCritiques of Limit Pricing and Quantity Commitment Model Will incumbent really produce at qL once the entrant is in the market?Only if there is someway he can commit to this level,otherwise the two firms will split the market as in Cournot.If

10、 there is no way to commit,entrant will not believe the incumbents threat-it is not credible.Credibility of Threats“Threats”are actually just statements about what players will do in future rounds.For a threat to be credible,it must be optimal for the person making the threat to carry it through.Exa

11、mpleEnterStay OutHigh PLow PHigh PLow P 2,2 -1,0 0,5 0,0 EntrantIncumbentFind optimal strategy for each subgame(prune the tree).Find Entrants optimal action.Chain Store Paradox Firm A has a store in each of 20 markets.In each market,there is a single local potential entrant.(Different PE in each mar

12、ket.)Currently none of the PEs has enough capital to begin operations,but in time they will.How should Firm A price in this situation?Chain Store Paradox,cont If Firm A accommodates entry,each firm has a positive profit although A PE.Think Cournot with heterogeneous costs.If Firm A fights,he can pri

13、ce low enough so that PE=0.Think Bertrand with heterogeneous costs.However if A fights,profit is less than if A accommodates.Assume A will have to maintain low price to keep PE out of the market.Chain Store Paradox,cont Should Firm A price low in the“first”market(i.e.,market where entry occurs first

14、)and drive the competitor out?Will lose money,but this market will serve as an example for the other PEs.“Proof”that A will fight.Dynamic game-must work backwards.In the“last”market,Firm A will not price low because that decreases total profit.Dominant strategy is to accommodate entry.Chain Store Pa

15、radox,cont In the“last”market,Firm A accommodates.In the next to the last market,no need to prove threat to PE in last market,since A will always accommodate.Therefore,Firm A should also accommodate the PE in the next to the last market.And so on Thus the“paradox”:even in a chain of markets,predator

16、y threats arent credible.Critiques of Chain Store Paradox Requires a fixed number of markets.If there are an infinite number of markets,or even just the possibility of additional markets,you can find situations under which predatory action is credible.In such a case,a firm may want to develop a repu

17、tation as a tough competitor.Capacity Expansion to Deter Entry aka the Dixit Capacity Expansion Model.Same basic setup:one incumbent firm and one potential entrant.Incumbent decides how large to build its plant(i.e.,how much capacity to build).With a plant of size K,the incumbent can produce up to K

18、 units at a marginal cost of w.To produce more than K units,he faces an additional MC of r for each unit above K.Incumbents Marginal Cost K Quantityw+rwCapacity Expansion,cont It costs the potential entrant F to enter the market.If the PE enters,the firms choose quantity as in a Cournot game.Since t

19、he PE must build his capacity and produce simultaneously,he faces a MC of w+r.If the PE doesnt enter,the incumbent acts as a monopolist.Capacity Expansion,cont In a Cournot game with two firms,quantity produced is a function of the firms,MC.BR for firm i:qi=(A+cj-2ci)/3b.As long as the incumbent pro

20、duces less than K,he has a lower MC,and thus will produce more than the entrant and make a larger profit.Best Responses of the Two FirmsqIqPEKFor output less than K,incumbent has lower MC and is on this BR curveFor output greater than K,incumbent has higher MC and is on this lower BR curveq*PE=q*ICa

21、pacity Expansion,cont By increasing K,the PEs optimal quantity(and profit)is decreased,which makes entry less profitable.In some cases,it may not be profitable for the PE to enter at all(if he cant cover F).Is the threat of the incumbent producing a high quantity of output credible?Yes.It is his Bes

22、t Response.How does the incumbent pick K?Finding the Optimal KqIqPEMonopolists optimal quantityMinimum that Incumbent will produce if PE entersMax.PE will produceMaximum that Incumbent will produce if PE entersMin.PE will produceCan the incumbent keep the entrant out?Depends on the PEs“break even”qu

23、antity.qIqPEMax.PE will produceIf break even q above this quantity,PE will never enterMin.PE will produceIf break even q below this quantity,PE will always enterIf break even q in this range,choice of K is criticalCapacity Expansion,cont If the incumbent picks K*so that the BR for the PE would be ju

24、st below the break even quantity,the PE will not enter the market.If K*M*(the monopolists optimal quantity)the strategy is predatory.If the K*0.5,entrants stays out,otherwise enters when he sees a low price.Limit Pricing GameNatureP*(l)P*(l)P*(h)IncumbentHigh cost,hP=1-Low cost,lP=PE E E E DNE DNE DNE10+5,-2 10+10,0 6+2,2 6+6,0 4+2,2 4+6,0