Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

Part Four

Anticompetitive Behavior and Antitrust Policy

The chapters in this section build on the game theoretic analysis of the previous three chapters to explore the tactics that firms can employ to blunt competitive pressures and thereby earn supracompetitive profits. In Chapter 12, we consider various tactics that exploit the first-mover advantage of the incumbent relative to a new entrant, such as the excess capacity investment stressed by Dixit (1980) and the bundling techniques discussed earlier in Chapter 8. We also present some empirical evidence regarding the use of excess capacity based on the Conlin and Kadiyali (2006) study of the Texas hotel industry.

In Chapter 13, we extend the analysis of so-called predatory behavior to include tactics that exploit either the information advantage that the incumbent has, as in the classic Milgrom and Roberts (1982) limit pricing paper, or the disadvantage that a small entrant might have vis-à-vis its creditors, as in the paper by Bolton and Scharfstein (1990). We then examine the use of long-term contracts to “tie up” consumers and deny a new entrant the customer base necessary to exploit scale economies. The empirical application for this chapter is based on the Ellison and Ellison (2011) study of the advertising decisions of pharmaceutical firms faced with potential new generic competitors as their key patents expire.

Finally, in Chapter 14, we consider the ability of firms to collude and suppress competitive pressures. Such ...