Chapter 11: Entry and Pricing Strategies to Deter Entry

Question 1

Fighting Brand

Answer 1

lower-priced offering launched by a company to take on, and ideally take out, specific competitors that are attempting to under-price them.

Question 2

Abuse of Dominant Position (4)

Answer 2

1. Law
2. Theory (Several Models)
3. Predatory Pricing Rules
4. Cases

Question 3

SLC - SPC

Answer 3

Substantially lessening/preventing competition

Question 4

Predation Rationality (3)

Answer 4

1. Merger
2. Predation pricing forces loss on the predator (predation period-recoupment period)
3. Purchase of rival - get rid of its assets

Question 5

3 Different Theories of Predation:

Answer 5

1. Deep Pocket (Long Purse)
2. Predation for Reputation
3. Signaling Model

Question 6

Deep Pocket/Long Purse

Answer 6

Rich firms drive their financially constrained competitors out of business by reducing their rival’s cash flow.
Rival’s ability to raise equity is limited and this is known by the predator.
Predator tries to impact the lender’s beliefs with aggressive pricing against the rival, reducing their profits, and the lender raises costs as a result.

Question 7

Predation for Reputation

Answer 7

A weak monopolist wants to appear strong and may increase its profits in the long run by behaving aggressively. Even though accommodation may be more profitable in the short run, you do this because it deters entry in the future

Question 8

Signaling Model

Answer 8

• One part conveys credibly some information about itself to another party
• raise production to appear like a low cost firm (limit pricing model)

Question 9

Predatory Pricing Rules (5)

Answer 9

1. P < AVC (Areeda-Tuner)
2. Output Expansion Rule (Williamson)
3. Rule of Reason (Sherer)
4. Two-Tiered Structuralist Rule of Reason (Joskow-Klevorick)
5. Average Avoidable Cost Test (Baumol)

Question 10

Predatory Pricing Rules: P < AVC

Answer 10

A firm will not operate or enter the market if the price lies below the AVC curve. Model with: AC, AVC, MC

Question 11

Predatory Pricing Rules: Output Expansion Rule

Answer 11

• If the incumbent firm is expanding output, when entry occurs, this would be evidence of possible predatory behaviour
• Output expansion will lower price and the entrant would not expect this, triggering an investigation into finding costs
• Typically, predation to the courts is related to pricing, not output.

Question 12

Predatory Pricing Rules: Rule of Reason

Answer 12

• The rules of reason is a legal approach by competition authorities or courts where an attempt is made to evaluate the pro-competitive features of restrictive business practice against its anti-competitive effects in order to decide whether or not the practice should be prohibited.
• REJECTED by most economists because it doesn’t offer a guide

Question 13

Predatory Pricing Rules: Two Tiered Structuralist Rule of Reason

Answer 13

Phase 1: look at the market structure, concentration of the market, market barriers, market shares of individual firms, market growth, etc., over the time period that the predation is being alleged. Does the incumbent have an incentive to engage in predation?

Phase 2: Price/Cost test

Question 14

Abuse Dominance Provision

Answer 14

• Abusive Dominance Provision - Abuse of a dominant position occurs when a dominant firm in a market, or a dominant group of firms, engages in conduct that is intended to eliminate or discipline a competitor or to deter future entry by new competitors, with the result that competition is prevented or lessened substantially.

Question 15

Predatory Pricing Rules: Average Avoidable Cost Test

Answer 15

• Price above shutdown point could still be predatory (some fixed costs might be avoidable)
• Does revenue cover avoidable costs?

Question 16

Avoidable Costs

Answer 16

Avoidable costs refers to variable costs that can be avoided, unlike most fixed costs, which are typically unavoidable. While avoidable costs are often viewed as negative costs, they may be necessary to achieve certain goals or thresholds

Question 17

Does Revenue cover avoidable costs? - Considerations

Answer 17

1. Supermarket example - they might not be bringing cost down of all products (so many products)
2. Air Canada - ticket sales, food&beverage, seats, cargo
3. Time period - monthly not yearly (could use revenue from one month to cover up for another month)