Faux Predation in Markets with Imperfect Information on Product Quality

Abstract

When consumers and producers are asymmetrically informed about product quality, faux predation is shown to be a profitable method of inducing a rival firm to exit. A successful episode of faux predation persuades an efficient rival to exit without requiring the faux predator to price below cost and recoup losses with higher prices in the future. Cost‐based rules for establishing presumptive evidence of predatory intent and behavior—such as the Areeda–Turner rule—will fail to detect faux predation since pricing below unit costs is not necessary. Faux predation can damage competition yet go undetected and undeterred under present antitrust law.