Hunting Unicorns? Experimental Evidence on Exclusionary Pricing Policies

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We study the effects of above-cost exclusionary pricing and the efficacy of three policy responses by running experiments involving a monopoly incumbent and a potential entrant. Our experiments show that under a laissez-faire regime, the threat of postentry price cuts discourages entry and allows incumbents to charge monopoly prices. Current US policy does not help because it only bans below-cost pricing. In contrast, we find that a ban on postexit price hikes encourages entry; a ban on deep price cuts reduces preentry prices and encourages entry. While both these alternatives have less competitive outcomes after entry than laissez-faire does, they nevertheless both increase consumer welfare. For the latter proposal, this consumer gain is at the cost of lower overall welfare from attracting inefficient entrants, while for the former, overall welfare is comparable to current US policy.

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