Non-cooperative strategic behavior:

Transcription

1 Strategc non-cooperatve behavor Vllas-Boas Non-cooperatve strategc behavor: Encompasses actons of one frm that wants to ncrease ts profts by mprovng ts poston relatve to ts rvals. To harm ts rvals To beneft tself These actons am at manpulatng the market envronment: Other exstng frms or by possble entrants Belefs of consumers and of exstng and potental rvals Technology and costs of frms and entry costs Must meet two condtons to be successful: Advantage/Asymmetry: The frm must have an advantage over the rvals (lke actng before them, or some other asymmetry between frms) Commtment: It must be credble that the frm wll follow ts strategy regardless of the actons of ts rvals => Credble Threat Example: commtment (π e =0,π m =$3,000) Accommodate (π d =$500, π d =$500) Fght ($-50, $200)

2 Strategc non-cooperatve behavor Vllas-Boas Example: flexble versus non-flexble technology (π m =$3,000, 0) Year 1 Flex/ =No Commtment In No fght fght ($200, -$50) ($ , 0) Not Flexble =Commtment In No fght (π d -1000, $500) fght ($200, -$50) Lets assume there are barrers to quck entry and ext so that other dentcal frms cannot use such strateges (ths assumpton provdes the Asymmetry needed for Condton 1. Advantage to be met and the courts need to show that the threat was credble) Frms (s) can engage n Predatory Prcng Lmt Prcng Excess Capacty as barrer to entry Investments to lower own costs, or Rasng rvals costs PREDATORY PRICING The ncumbent frm lowers ts prce frst, such that rvals are drven out of busness or to scare off potental entrants and then rases the prce when rvals ext the market. In partcular, the ncumbent lowers prce below some measure of costs, engagng n short run losses. The benefts are the long-run gans of beng alone n the market. It s essental that the ncumbent can survve lower prces (short-run losses) longer than ts rvals, so that predaton s a credble threat One way to prevent entry s to sgn long-term contracts wth buyers to lmt entry of lower cost frms (Aghon and Bolton, 1987). However, entrants could also sgn long-term contracts when ncumbent threatens predaton. The buyers would accept to sgn such contracts f prce s lower than the ncumbent s monopoly

3 Strategc non-cooperatve behavor Vllas-Boas prce. When the ncumbent engages n predaton the cut n prce would not hurt the entrant. As mentoned before, wth dentcal frms, predaton may not be successful, because the ncumbent cannot make a credble threat of predaton. A credble threat can happen f the ncumbent frm has some advantage (large, low cost frm) or has acqured a certan reputaton (rvals beleve gven past prcng strateges of frm t s gong to set low prces and fght f faced wth entry of rvals) After the rvals are drven out of busness the predator has to be able to prevent the rvals assets from beng bought by another frm that enters when the prce rses agan PREDATION AND ANTITRUST LAW It s llegal to charge P<MC to drve out competton In practce, t s hard to evaluate and hard to prove Anttrust authortes don t want to mstake predaton for ntense competton (Easterbrook, 1981 only consder a sut f a frm had been drven out of busness and predator has agan rased market prce. Otherwse law s protectng less effcent frms from lower prces) Predaton n Tobacco markets: Amercan Tobacco ( ) engaged n predatory prcng (prce below producton costs) to acqure cheaply the rvals who were drven out of busness From volaton of anttrust laws, n 1911 the Tobacco Trust was dssolved and broken nto 3 companes. Later these three frms were also charged wth colluson and predaton to drve rvals out of busness (n 1946) Predaton and Acquston costs of rvals Saloner (1987). Model of predatory prcng where the ncumbent predates aganst another company to acqure ts assets at a cheap prce Burns (1986), tests Saloner s model : Classcal emprcal paper Measures f the acquston prce s lower n geographcal markets where Amercan Tobacco engaged n predatory prcng For the frms that were subect of predaton the acquston prce was 60% lower For the frms that were not drectly subect of predaton but were Amercan Tobacco compettors, the acquston prce was also lower, 25%, that s the reputaton effect was also strong

4 Strategc non-cooperatve behavor Vllas-Boas LIMIT PRICING A frm sets ts prce and output such that there s not enough demand left over for another frm to enter the market proftably To be credble ths entry-deterrng strategy must satsfy two crtera: 1. Leave the ncumbent wth hgher profts as a monopolst (net of the cost of the entry deterrng strategy) than he would earn competng wth the entrant. 2. Change the entrants expectatons about post-entry profts. The potental entrant beleves that the ncumbent wll not change ts output after the new frm enters. Ban(1956), Modglan(1958), Sylos-Labn (1962) Can a low prce deter entry? Wth dentcal frms no Graphcally $ p1 Market Demand AC s resdual demand q1 put Wth dentcal frms wll not work! The ncumbent has to pursue a strategy n whch the lmt prce plmt and a quantty of qlmt s the optmal prcng strategy after entry. P lmt ( ,-100) IN P lmt Inc. Y2 Pno fght ( , 100) Year 1 OUT OUT (1825, 0) (2450, 0) Pno fght P lmt ( , -100) IN Inc. Y2 Pno fght (1325, 100)

5 Strategc non-cooperatve behavor Vllas-Boas LIMIT PRICING ASYMMETRIC FIRMS Low prces can be a sgnal of: wth low costs. Low market demand. If the entrant has mperfect nformaton about these thngs, lmt prcng can be an effectve entry deterrng strategy. Mlgrom-Roberts model of lmt prcng (1982, see Trole chapter 9 on Informaton and Strategc Behavor, for a smplfed verson f you are nterested - optonal) STACKELBERG-SPENCE( 1977)- DIXIT (1980) MODEL When wll a frm chose to deter or accommodate entry? When s entry blockaded, so frm has no need to worry about entry? Model: Stackelberg game, frm 1 chooses capacty k1 and gven k1 frm 2 (the entrant) chooses capacty k2. Profts: π ( k, k π k ) = k (1 k < 0, and ( π / k ) < 0. k k ), where Frm 2: RF2: k2=(1-k1)/2 Frm 1: Max (1-k1-k2(k1))k1 k1*=1/2 Profts: frm 1: 1/8 frm 2: 1/16 If f, entry costs f>1/16 entry s blockaded f<1/16 deter or accommodate? Frm 1: knowng that maxmum profts of frm 2, gven k1 are (1-k1-(1-k1)/2)(1-k1)/2-f then k1 such that profts 2 are negatve k _ det er = 1 2 f 1 Prefers deter f profts deter= ( 1 2 f )(1-1 2 f -0) > profts accommodate=1/8. f< accommodate, <f<1/16 deter, f>1/16 entry s blockaded.