A Policy to Prevent Rational Test-Market Predation

Abstract

This article models the problem of designing predation policy as one of structuring incentives so that firms choose not to practice predation but to engage in nonpredatory competition. The government decides how intensively to search for possible predatory incidents, how thoroughly to investigate each incident, and how much to penalize convicted predators. We consider test-market "bluffing" predation in which incumbents with high costs can deter entry into a national market by pretending to have low costs. If fines are merely transfers, the optimal fine is the largest one that is feasible. Furthermore, the government should avoid injunctions against "continued predatory pricing."