Exclusionary Pricing When Scale Matters

Authors


  • We are indebted to two anonymous referees, the Editor, Claudio Calcagno, Daniel Cerquera, Claude Crampes, Joe Farrell, Carl Shapiro, Yossi Spiegel, Jeanine Thal, Hélder Vasconcelos, John Vickers, Christian Wey, and especially Chiara Fumagalli and Patrick Rey, for helpful comments and suggestions. We are also grateful to seminar participants at Hitotsubashi University, Tokyo; CORE, Université Catholique de Louvain; University of Vienna; University of Linz; CEPR Conference on Applied Industrial Organisation, Madeira; 2nd CSEF Symposium on Economics and Institutions, Capri; 1st CRESSE Conference on ‘Abuse of Dominance’, Corfu; CCP Workshop 2005, University of East Anglia; Kiel-Munich Workshop on Economics of Internet and Network Industries 2005; EMNet Conference 2005, Budapest; 2nd Workshop on Empirical IO, University of Innsbruck; European Economic Association Meeting 2006, Vienna; IDEI Conference on the Economics of the Software and Internet Industries 2007, Toulouse; EUI, Florence; RNIC Conference, ZEW Mannheim; Economics of ICT Conference, ENST, Paris, EARIE 2007, Valencia; ASSET 2007, Padova; and University of Bologna. Motta gratefully acknowledges financial aid from the Spanish Ministry of Science and Innovation (Project ECO 2010-A5052). The usual disclaimer applies.

Abstract

We consider an incumbent firm and a more efficient entrant, both offering a network good to several asymmetric buyers, and both being able to price discriminate. The good has positive value to buyers only if the network size exceeds a certain threshold. The incumbent's installed base guarantees this critical size to the incumbent, while the entrant needs to attract enough ‘new’ buyers to meet this threshold. We show that price discrimination (in the various forms it may take) reduces the set of achievable socially efficient entry equilibria, and discuss the policy implications of this result.

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