Dominance

1
Dominance

• 4.1 Strategic behaviour
• behaviour only optimal if it influences others,
  eg raising entry costs for others
• pre commitment
• predation
• retaliation
• 4.2 quantity leadership (Stackelberg)
• as Cournot but one firm can pre-commit knowing
  other will follow

2
4.3 limit pricing

• 4.3.1 1950s Bain (Sylos Labini) models about
  pricing
• Critics said it would always lose money
• new variants refer to quantities
• Can incumbent commit to output that will make
  entrants max profit negative if they enter?
•      if natural monopoly no need to
•      if contestable market no chance
• depends on scale of sunk entry costs

3
4.3.2 pre commitment

• to make deterrent action optimal
• to signal willingness to be irrational or depth
  of pocket
• deep pocket deterrence
• imperfect info
• signaling example
• firm with high marginal cost acts as if it could
  profitably pre commit to keep output up
• Some Dot com businesses deliberately incurred
  very heavy costs to signal

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4.4 Predation chain store paradox

• Predation costly but brings future benefts
• chain store operates 20 shops.
• at each one it can aggressively retaliate and
  lose money but if it can deter entry next period.
• would not work if everyone could work out what
  others would do.

5
The game

• suppose game has finite duration.
• firm has no incentive to deter in last period.
• so in next to last period (t-1) entrants will
  know they have a clear run for period t so
  cannot be deterred.
• so deterrence wont be profitable in t-1
• andthen you can't deter in t-2 either!
• But with imperfect ïnfo it may work if you can
  persuade others how you would react.

6
Other cases

• choice of multinational investment rather than
  supply from abroad.
• choice of technique capital intensive vs labour
  intensive
• never knowingly undersold
• MS university licensing
•  

7
4.5 Rome Treaty Art 4.5

• forbids abuse of dominance
• limiting output or unfair prices
• but defined how?
• original legal basis for merger control
• cf US ban inb monopolisation

8
4.5.1 Price discrimination

• United Brands
• market definition- soft fruit vs bananas
• kt ptices different betwee diffrent markets. UB
  forbade resale of unripe bananas.
• segmenting markrts wrong but diffrent pices may
  not be
• cf car industry

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4.5.2 Abuses  

• Hoffman Laroche.
• British Airways loyalty bonuses for dominant
  buyers sellers not legal.
• cf Microsoft - per processor agreement

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other cases of predation

• AZKO vs ECS
• cut prices in rivals main product home market
  http//www.compecon.ie/predation.htm
• IBM case in 1960s free computers for universities
• Laker case BA and others forced first low
  cost airline out of Atlantic market vby
  selective price cutting

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Predation

• Predatory pricing has a long history in
  competition law dating back to the US Standard
  Oil case in 1911. Allegations of predation also
  featured in the more recent Microsoft case. In
  recent years there have also been allegations of
  predation in the airline industry in the US,
  Canada and Australia and several instances of
  alleged predation in bus transport in the UK.
• Allegations of predation tend to greatly exceed
  the number of proven cases. This is due in part
  to the fact that predation is complex and rather
  difficult to prove. However, small firms have a
  clear incentive to allege predation by larger
  rivals in order to obtain protection against what
  is simply vigorous competition.
• http//www.compecon.ie/predation.htm

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References on predation

• L Phlips in Applied Industrial EconomicsAKZO
  Inverness Buses really competition!
• http//www.johnkay.com/regulation/18
• Low prices for the Times
• The AKZO Decision A Case of Predatory
  Pricing?Louis Phlips and Ireneo Miguel Moras
  Journal of Industrial Economics, 1993, vol. 41,
  issue 3, pages 315-21
• Says AKZO just competing
• G.Yarrow www.rpieurope.org/Yarrow2004.ppt
• review

13
Testing for predation

• Is price below AVC?
• Is there an intent to monopolise
• Would a rational firm make money?
• (Critiques of Standard Oil case)

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4.5.3 Public monopoly

• commercial activity of public monopolies also
  covered musnt stop comeptition in other areas
• public utility defined quite broadly
• Commission used competition powers to break up
  telecoms monopolies
• claim that it is going too far in public
  transport (cf GATS)

15
Conclusions

• Chicago view now viewed sceptically
• Several cases of predation and abuse of dominance
  brought again
• But if you take Woodpulp burden of proof it is
  hard to show these are just Nash equilibria