Pre-entry Price Research Articles

The Antitrust Prohibition of Excessive Pricing

Excessive pricing by a dominant firm is unlawful in many countries. To assess whether it is excessive, the dominant firm’s price is often compared with price benchmarks. We examine the competitive implications of two such benchmarks: a retrospective benchmark where the price that prevails after a rival enters the market is used to assess whether the dominant firm’s pre-entry price was excessive, and a contemporaneous benchmark, where the dominant firm’s price is compared with the price that the firm charges contemporaneously in another market. We show that the two benchmarks restrain the dominant firm’s behavior when it acts as a monopoly, but soften competition when the dominant firm competes with a rival. Moreover, a retrospective benchmark promotes entry, but may lead to inefficient entry.

The antitrust prohibition of excessive pricing

Excessive pricing by a dominant firm is unlawful in many countries. To assess whether it is excessive, the dominant firm’s price is often compared with price benchmarks. We examine the competitive implications of two such benchmarks: a retrospective benchmark where the price that prevails after a rival enters the market is used to assess whether the dominant firm’s pre-entry price was excessive, and a contemporaneous benchmark, where the dominant firm’s price is compared with the price that the firm charges contemporaneously in another market. We show that the two benchmarks restrain the dominant firm’s behavior when it acts as a monopoly, but soften competition when the dominant firm competes with a rival. Moreover, a retrospective benchmark promotes entry, but may lead to inefficient entry.

Entry under uncertainty: Limit and most-favored-customer pricing

In the absence of uncertainty, an incumbent that attempts to prevent entry of rival firms can have no incentive to offer a most-favored-customer (MFC) clause because it could lead to higher post-entry prices. Our analysis suggests that this is not necessarily the case under uncertainty. In the presence of uncertainty, the incumbent can set a limit price that affects the entry decision. Limit pricing involves a pre-entry price different from the static monopoly price, which leads to a signaling cost. We show that part of this cost can be distributed over several periods by means of consumer refunds from the MFC clause. If the discount factor is not very high, the incumbent adopts this pricing and prevents entry to a larger extent.

The Oligopolistic Pricing Problem: A Suggested Price Freeze Remedy

The problem of oligopoly pricing has long challenged both economic and antitrust theory. While economic theory attempts to explain how firms set their prices in oligopoly markets, antitrust theory seeks to construct an effective remedy for what is believed to be a predominant problem of monopolistic pricing. So far these attempts have been only partially successful. Although economic scholarship has made significant advances in recent years, especially in development models based on modern game theory learning, we still do not hold conclusive or definite answers on oligopoly pricing. Antitrust theory, for its part, is still struggling in its quest for effective remedies. [This] Article set[s] forth an antitrust remedy for the oligopolistic pricing problem, build[ing] on previous work concerning price and quantity freezes, mainly in the context of monopolization by predation. This work, primarily by Williamson and more recently by Edlin, basically suggests that new entry to a monopolistic market would freeze the pre-entry price output production level or the pre-entry price of the incumbent monopolist. This would, arguably, encourage new entries by firms as well as more pre-entry output or lower pre-entry prices. [This Article] propose[s] the implementation of a price freeze scheme in oligopoly markets by which an oligopolist that significantly lowers its price would freeze its rivals’ prices at their previously higher oligopoly level for a defined period of time. This price scheme would drive prices downward and create an incentive for oligopolists, in most cases, to set ex ante lower prices without an actual activation of the price freeze.

Price wars triggered by entry

To attract customers who incur set-up (or switching) costs, new firms offer below-market prices when entering a market. The incumbent responds with discounts, resulting in a price war. Once new entrants have “locked in” their customers, the price warfare stops and all firms raise their prices. During the price war, the incumbent's price is not as low as the entrants'. After the price war, the market price is lower and output is greater than the pre-entry price and output. Entrants attract new buyers to the market and, depending on the size distribution of set-up costs, we show that some of the incumbent's customers switch to entrants. The model is shown to square with the price and output sequences observed in a price war that was the subject of a recent and prominent antitrust case in the cigarette market.

Is the monopolist the friend of the conservationist? Two remarks on the Hotelling-Solow paradox

In this paper, we consider the efficient use of an exhaustible resource. The well known Hotelling-Solow paradox states that the monopolist is the friend of resource conservationist. We examine it from two different aspects. One is from the aspect of uncertainty, especially the uncertainty of demand fluctuation. The other is from the market competitive effect given by the probability of entry of a competing supplier. We show that such uncertain factors as demand fluctuations are crucial determinants of the extraction policy of the resource owner. There may be a case in which the Hotelling-Solow paradox does not hold. The risk factor might cause the resource owner to discount the existing amount of resource stock. This serves to establish a counterexample to the Hotelling-Solow paradox. Secondly, market competitive power works against resource conservation. The resource owner's optimal pricing policy is developed under the assumption that the entry probability is a non-decreasing function of the resource price and the objective is present value maximization. It is shown that the optimal pre-entry price is set lower than the one in the case without uncertain entry. In this sense, the resource is exhausted more rapidly and there is a possibility for market power working against conservation.

Oligopoly Limit Pricing

We expand Milgrom and Roberts' (1982) limit pricing model to allow for multiple incumbents. Each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent's preentry price. We find that incumbents are unable to coordinate deception, which results in a separating equilibrium in which preentry prices are not distorted. Further, introducing the refinement of unprejudiced beliefs, we show that the no-distortion equilibrium is the only refined separating equilibrium. Plausible pooling equilibria fail to exist or involve downward distortions in preentry prices.

Advertising and Limit Pricing

We enrich Milgrom and Roberts' (1982) limit-pricing model to allow an incumbent to signal his costs with both price and advertisements. Our fundamental result is that a cost-reducing distortion occurs, in that the incumbent behaves as if there were complete information but his costs were lower than they are. Preentry price is therefore distorted downward, and demand-enhancing advertising is distorted upward, as a consequence of signalling. If advertising is a purely dissipative signal, it is not used, nor therefore distorted. Recent refinements of the sequential equilibrium concept are featured.

Oligopolistic Entry Deterrence under Incomplete Information

Recent work has investigated the effects of asymmetric information between an incumbent firm and a potential entrant. This study extends the analysis to allow the initial market structure to be a noncooperative oligopoly. We show that there is a Bayesian Nash equilibrium in which the incumbent firms, although unable to collude, strategically deter entry that would have occurred under complete information. In contrast to the past limit-pricing literature, it is a high price that deters entry as it signals to the potential entrant that this is a high-cost industry. Extending the model to allow for multiple potential entrants, we find that increasing the degree of potential competition raises the preentry price and reduces the likelihood of entry.

Prices, Capacity, and the Entry Decision: A Conditional Logit Analysis

An understanding of what potential entrants consider in reaching an entry decision is important in assessing the validity of some rather fundamental hypotheses concerning the behavior of firms faced with an entry threat. The reason is that such hypotheses are based on implicit assumptions concerning what influences the decisions of potential entrants. If, for example, established firms deter entry by adjusting their prices, as suggested by the limit-pricing hypothesis, then it must be true that prices in fact influence potential entrants.1 Similarly, if firms build capacity to deter entry, as suggested recently by Spence [8], then it must be true that observed capacity in fact influences the entry decision. Hence, an examination of whether these considerations are important to potential entrants can be interpreted as a test of a necessary (though not sufficient) condition for the existence of these types of behavior on the part of established firms. Despite the significance of this question as a foundation upon which a number of important hypotheses concerning firm behavior rest, few studies have attempted to estimate the relationship between the relevant market characteristics and the behavior of identifiable potential entrants. The reasons for this are not hard to isolate. Price data of the type required is not generally available for most industries, leaving untested the frequently debated relationship between pre-entry market price and the entry decision. Also, in the interindustry context in which empirical resesarch is usually conducted, it is virtually impossible to account systematically for the differing levels of knowledge and experience among potential entrants, and such differences may significantly influence the relative attractiveness of markets for entry. Thus any attempt to estimate the relationship between market characteristics and the entry decisions of individual potential entrants in the interindustry context will founder on the inability to account for the influence of knowledge and experience on the attractiveness of the potential entrant's choices. This paper circumvents these problems by examining the relationship between market

Short-Run Industry Performance and Potential Competition

A CENTRAL issue in industrial economics is how the price set by an established seller is affected by the threat of competition from newcomers to the market. It is commonly predicted that an intensification of this threat due to a fall in the non-price barriers to entry will result in a reduction of the entryretarding industry price [8], [s], [2]. Recently we found [4] that such a pre-entry price may also increase with a lowering of the barriers to entry when the established firm realizes that there is a positive finite entry lag between a rival's decision to enter and his appearance as an effective competitor. Our intention in this note is to elaborate on this finding. Exploring the comparative statics analysis of our earlier work we argue that, with an entry lag, a constant pre-entry price attains a minimum value for some intermediate (exogenous) threat of competition where entry is neither free nor blockaded. This intermediate value and the corresponding minimum price policy are characterized.

Limit Pricing, Uncertain Entry, and the Entry Lag

An established seller's pre-entry price policy is studied under the assumption that this policy affects the probability of entry and that rivals need an entry lag to make their entries effective. The analysis is conducted using a modified Kamien-Schwartz limit pricing model.