Abstract
Incentives to engage in predatory pricing are examined using a reduced-form approach that captures the tradeoff between loss of current profits from predation, and gain in future profits if predation is successful. Under some conditions a predator can impose losses on a victim at little cost to itself. Simulations are performed with the retail liquor market in Edmonton, Alberta. Predation is found to be more cost effective when nearby competitors are few. Predation is more attractive to store chains than to independent stores if chain members are spatially dispersed so that cannibalization of sales within the chain is minimized.
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