Predatory Conduct and Collusion

Gibrat’s Law: The rule proposed by Robert Gibrat in 1931, stating that the distribution of firms’ size in a market is log-normal and that an individual firm’s market share over time is a random variable.

Siegfried and Evans (1994) found that while industries with higher profit potential and lower capital costs have higher entry rates, those with higher requirements of sunk capital have faster exits.

According to Gibrat’s Law, the distribution of the firms’ size becomes unequal over time regardless of the initial size of the firms, and market concentration increases over time.

Predatory conduct refers to a set of strategies that are conducted by firms to discourage or deter other firms from competing in the market.

While predatory pricing is a type of predatory conduct with the ultimate aim of driving the rivals out of the market, limit pricing is a strategy to preempt potential rivals from entering the market to begin with

Bain (1956), in a seminal paper on the barriers to market entry, identifies three barriers: the
absolute cost advantage of the incumbent firm, the requirement of large capital expenditures, and product differentiation.

A credible threat is a strategy chosen by the player in a sequential game that would lead to an outcome in the player’s best interest. On the other hand, a non-credible threat is a strategy that a rational player would not choose as the outcome would not be in the player’s best interest.

First-mover advantage, in sequential games, refers to the ability of the player being better than the competitors due to having the chance to choose its strategy before the competitors.

We assume that the main variable of choice is quantity in the Stackelberg model.

Milgrom and Roberts (1982) showed that the limit pricing strategy would lead to a beneficial outcome for the incumbent firm under asymmetric information.

Another type of predatory conduct to deter potential market entry is proposed by Dixit (1980) in his seminal study entitled “The role of investment in entry-deterrence”.

If the incumbent firm wants to deter entry, at the first stage of the game, it needs to choose a capacity level, namely the limit capacity KIL, which will correspond to the output level at the second stage of the game, namely qIL

The main objective of these predatory conduct strategies held by the incumbent firms is to
decrease competition in the market by deterring potential entrant firms from entering the market

The rationale for the cartel is to fix the prices across its members to ensure the highest profit possible for the whole group.

Collusion refers to a situation in which two or more firms engage in a secret agreement to charge prices close to a monopolistic market, well above the competitive level.

There are two types of collusive behavior, (1) explicit collusion, where firms act as a cartel, and (2) tacit collusion, where firms act in a non-cooperative behavior yet still become able to charge high prices.

“Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors to raise, lower, maintain, or stabilize prices or price levels.”

In game theory, Pareto-optimality or Paretoefficiency is an equilibrium outcome, from which if any of the players deviate, it is impossible to make one player better off without making the other(s) worse off.

The Bertrand Paradox is defined as the situation in which two firms produce a homogenous
product with a symmetrical cost structure do not act cooperatively and ultimately set their prices equal to their marginal costs at the Nash equilibrium.

The idea that as long as players are “sufficiently” patient cooperative agreement could be achieved in repeated games is known as the Folk Theorem