- Series: Studies in Law and Economics
- Hardcover: 176 pages
- Publisher: University of Chicago Press; 1 edition (July 1, 1999)
- Language: English
- ISBN-10: 0226493555
- ISBN-13: 978-0226493558
- Product Dimensions: 6 x 1.1 x 9 inches
- Shipping Weight: 15.8 ounces (View shipping rates and policies)
- Average Customer Review: 6 customer reviews
- Amazon Best Sellers Rank: #4,077,054 in Books (See Top 100 in Books)
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Are Predatory Commitments Credible?: Who Should the Courts Believe? 1st Edition
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...in Are Predatory Commitments Credible?, John R. Lott Jr. masterfully picks apart the game theorists' argument. -- The Wall Street Journal, David R. Henderson
About the Author
John R. Lott, Jr. is the John M. Olin Fellow in Law and Economics at the University of Chicago.
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As the Chicago School ideas triumphed in Washington, they came under attack in the academy. One source of attack was the new industrial organization (NIO), based on game theory, which was revolutionizing all areas of economics. More recently, the analysis of "path dependence" has formed a second prong of attack. The game theorists created a host of models showing that with certain assumptions about information, strategy, and the structure of the game, a threat to use predatory pricing could, in theory, be profitable.
John Lott's book Are Predatory Commitments Credible? Who Should the Courts Believe? is the second major counterattack from the Chicago School.
If firms accused of predatory pricing do not seem to differ systematically from the control group, is any firm capable of following a predatory-pricing strategy? In effect, could any organization commit to not maximizing profits, if only for a limited period of time? Lott's answer is that one group of firms can make such a commitment: publicly owned firms. The basic idea comes from Niskanen's model (William Niskanen, Bureaucracy and Representative Government [Chicago: Aldine Atherton, 1971]): publicly owned firms maximize size rather than profit. Lott gives several examples, but none hits closer to home than the public university, which must maintain enrollment in order to maintain the size of the faculty and therefore sets prices considerably below costs.
Lott's second type of evidence that publicly owned firms practice price predation is the fact that dumping cases-the international version of predatory-pricing complaints-have been filed under the General Agreement on Tariffs and Trade more frequently against firms from communist countries than against firms from noncommunist countries. Lott shows, therefore, that the NIO theory of predatory pricing makes sound predictions (hawks practice predatory pricing more than doves), but it has limited application to the private-enterprise system, to which its advocates intended it to apply.
Lott's third argument supplements the theory of predatory pricing. He extends Jack Hirshleifer's observation that inventors of public goods can internalize at least some of the value of their invention by taking long or short positions in assets whose price will change after the discovery is made public (see Jack Hirshleifer, "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review 61 : 561-74). Lott extends this idea by arguing that an entrant facing an incumbent with a reputation for toughness should take a short position in the incumbent's stock, enter, and reap trading profits. In effect, the incumbent firm with a reputation for toughness finances the entry of its own competitors. The entrant can also make profits by exiting. If the entrant enters and finds that it cannot withstand the attack of the hawk, it can take a long position in the incumbent's stock, exit, and collect the trading profits. Either way, trading profits increase the incentive to enter because whether or not entry ultimately succeeds, trading profits allow the entrant to make a profit. As Lott puts it, "the more successfully a predator deters entry, the greater the return that trading profits create toward producing new entry. Creating a reputation to predate can thus be self-defeating" (p. 115).
Lott's trading-profits theory is alone worth the price of the book-a credit to Lott and an indictment of the NIO. One of the basic insights of economics is that well-established markets threaten rents. Lott's simple application of this wisdom ought to change the way economists think about antitrust cases and the way they are litigated both as private and as public cases. The notion that trading profits can mitigate or eliminate the private damage from predatory pricing should certainly give antitrust experts cause to worry about the efficiency of treble damages. I await the day when the defendant in an antitrust case will respond, "If my actions were predatory, why didn't the plaintiff just buy my stock short and use the profits to stay in the market."
This book is a must-read for anyone who wishes today to comment upon the law or economics of predation.
Mr Hellard writes "Lott extends this idea by arguing that an entrant facing an incumbent with a reputation for toughness should take a short position in the incumbent's stock, enter, and reap trading profits" It's a good idea, but 1) not every company is quoted on the Stock Exchange ! and 2) the price variations of the stock can be dependent on many other factors besides the incumbent/entrant rivalry (especially nowadays...).
I agree that state-owned firms are especially prone to predatory pricing and other anti-competitive behavior. I have been working for 8 years in the French telecommunications market, and the French state monopoly (France Telecom) has always tried everything legal and illegal to stifle competition. Predatory pricing is one of France Telecom's many weapons.
Officially, the French market was open to competition in 1998, but in reality many key services have remained in the grips of France Telecom so far, which has allowed the behemoth to lower charges on competitive services, while charging sometimes the equivalent of 10 times the U.S. rate on some other vital services which are not yet fully open to competition (like leased lines).