Strategic buyers and market entry

Abstract

This article tests two basic assumptions underlying court-made or statutory provisions prohibiting predatory pricing. Such prohibitions are usually based on the economic grounds that monopolistic pricing is likely to occur in the long run, causing harm to competition and consumers. The first assumption under scrutiny is that customers will accept monopolistic prices during the subsequent phase of recoupment, even though they have become accustomed to low prices during the price war. The second assumption is that no competitor will (re-)enter the market in this subsequent phase. Our two experiments indicate that both assumptions are not backed up by actual decision making by either consumers or competitors. Moreover, we find that consumers use their market power in order to maintain long-run competition.