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In economics, predation is a way of excluding

In economics, predation is a way of excluding competitors from the market (Exclusionary Practice). It is typically characterized by an aggressive price reduction during a certain period in order to force the other firms to incur in losses and pressure them to leave the market. This may imply that the firm predating are having losses (depending on the firms’ cost structure).
In a naïve perspective, predation seems to be a way of competing which increases welfare. However, a firm doing predatory pricing is reducing its profits today in the expectations of increase them in the future and overcompensate the practice; otherwise it would not act in that way.
Identify predation has the problem of the most action from a competitive authority: It is hard to be sure if predation is happening. First, knowing the cost structures of each firm (marginal costs) on detail would help in the decision and most of the times it is not possible. Second, as stated before, the market impacts of predation are substantially similar to the ones in a pricing war/competitive environment and no competition authority would like to stop competition which is welfare increasing by mistake.
Even knowing the cost structures, identifying predation/exclusionary behavior may be hard: in a case where the dominant firm has a lower cost structure (marginal cost) then its rival, it can exclude the other firm by competing and it does seem to be a problem because competition authorities should not protect firms (even if they are less efficient) but the functioning of markets. What if the most efficient firm in the end acts as a monopoly? Should we still argue that it is not predation? Probably not, the firm was excluding the other firm from the market in order to extract higher profits in the future. In this case, identifying predation seems to be easy after exclusion: Just need to see an increase in prices after the period of “competition”.
Although, identifying the problem can be too late because rivals are already out of the market and competition may take time to arise. In some situations it is likely to have a trade-off between being too late to avoid the impacts of predation and being sure about the practice. Facing this dilemma, competitive authorities have ways of reducing the firms’ incentives of predating: one way is set a period in which firms cannot raise prices after a reduction; it will decrease the benefits of excluding other firms from the market. In Portugal, pharmaceutical sector is subject to a restriction of this nature. Other way of tackling the problem is through, setting capacity constraints for firms where you prevent them for taking the whole market share from its competitors even if they are predating because they do not have capacity.
The policies presented have some drawbacks: they can force the firms to be inefficient (e.g. have a capacity constraint during a boom, cannot sell the desired quantity). In some sectors, the costs of having these policies are higher than the potential benefits, depending in the probability of having predation. Competition authorities need to analyze the market and identify features that increase the probability of having predation as barriers to entry (high sunk costs), the degree of homogeneity of products (easier to take market shares) and then decide if anti-predation measures are likely to increase welfare or not.
Guilherme Rodrigues 541

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Author: studentnovasbe

Master student in Nova Sbe

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