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It has long been part of the popular folklore of business that firms sometimes engage in predatory actions against their competitors. For example, a firm might cut its price so low in some local market where it faces competition that neither the firm nor its competitor can earn a profit there. Such price-cutting would be called ‘predatory’ (by some) because it is inconsistent with short-run profit maximization by the firm and it appears to benefit the firm in the long run only by bankrupting or otherwise weakening its rival. Of course, predatory actions are not limited to pricing decisions — for example, a choice of store locations by a grocery chain too near its competitors could be predatory — but our discussion in this short note will focus on predatory pricing and the theoretical controversy surrounding it.
KeywordsLimit Price Incumbent Firm Potential Entrant Price Cutting Predatory Price
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