ECON 305 Lecture Notes - Lecture 14: Predatory Pricing
11 Dec 2014
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Document Summary
There has been a long debate about nature and reality of pp (a) the old theory: the standard oil story: rockefeller bought small independent oil refineries after having lowered price to drive them out of business. Mcgee rejects this view and argues that rockefeller"s rivals were bought out on rather favorable terms. (b) the new theory: mcgee"s classic analysis of pp (1958) he looked at the. Standard oil records and concluded that predatory pricing is a long-term irrational behaviour so it was better for them to collude. The argument can also be cast in game-theoretic terms. The prey will enter the market for sure because it knows it is not profitable for the predator to prey. Worst case scenario the prey does not mind a -10 loss. But the game is only single play. If a game is played a finite number of times, the logic you apply to a one shot game also applies.
