Entry Deterrence II
Week 4
Entry Deterrence II Limit Pricing / Predatory Pricing
Limit Pricing (I/II)
Keep price low in spite of monopoly position
Signal to the potential entrant • “low demand” (market may appear unattractive) • "low cost incumbent“ (dangerous competitor)
Works only in presence of incomplete information
Limit Pricing (II/II) Example: Ferries and the Eurotunnel
The market for channel crossing was traditionally dominated by P&O Ferries and Stena Lines
Around the time rumour surfaced that the Eurotunnel might be realized, both reduced prices by up to 50%
After opening of the Eurotunnel, P&O and Stena merged and raised prices again to initial level
Dover Folkestone Calais
Predatory Pricing (I/II)
Charging low prices (even below marginal costs) in the current competition • to induce exit
• and deter future entry Works only in presence of incomplete information
Predatory Pricing (II/II) Example: UK Newspaper Industry The Times
The Independent
Price
Copies
Price
Copies
1992
£ 0.45
382,000
£ 0.45
372,000
1993
£ 0.30
388,000
£ 0.50
333,000
1994
£ 0.20
550,000
£ 0.30
279,000
1995
£ 0.25
675,000
£ 0.35
296,000
1996 / 1997
£ 0.35
790,000
£ 0.40
260,000
1998
£ 0.35
770,000
£ 0.45
219,000
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
Entry Deterrence II Limit Pricing / Predatory Pricing
Limit Pricing (I/II)
Keep price low in spite of monopoly position
Signal to the potential entrant • “low demand” (market may appear unattractive) • "low cost incumbent“ (dangerous competitor)
Works only in presence of incomplete information
Limit Pricing (II/II) Example: Ferries and the Eurotunnel
The market for channel crossing was traditionally dominated by P&O Ferries and Stena Lines
Around the time rumour surfaced that the Eurotunnel might be realized, both reduced prices by up to 50%
After opening of the Eurotunnel, P&O and Stena merged and raised prices again to initial level
Dover Folkestone Calais
Predatory Pricing (I/II)
Charging low prices (even below marginal costs) in the current competition • to induce exit
• and deter future entry Works only in presence of incomplete information
Predatory Pricing (II/II) Example: UK Newspaper Industry The Times
The Independent
Price
Copies
Price
Copies
1992
£ 0.45
382,000
£ 0.45
372,000
1993
£ 0.30
388,000
£ 0.50
333,000
1994
£ 0.20
550,000
£ 0.30
279,000
1995
£ 0.25
675,000
£ 0.35
296,000
1996 / 1997
£ 0.35
790,000
£ 0.40
260,000
1998
£ 0.35
770,000
£ 0.45
219,000
Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich
© 2013 LMU Munich
