Predation
Over the years several companies have been accused of unfair practises. During Margaret Thatcher's rule, British Airways was accused of lowering airline prices below their costs in order to push a new low-cost airline Laker Airways out of the industry. Freddie Laker was a pioneer of the concept of low-cost airlines. In 1966 Laker Airways was born by Freddie Laker, aggressive behaviour by British Airways led to the bankruptcy of the airline in 1982 (Margaret Thatcher and her relationship with Reagan was seen to be one of the causes of this bankruptcy. Watch the documentary here). Nonetheless, this didn't kill his dreams as he went on to operate his airline from the Bahamas. Laker Bahamas had two weekly flights to Florida and London.
Both the U.S. Department of Justice and the European Commission found Microsoft in violation of anti-trust laws in the 1990s. Some accusations included refusal to deal and putting restrictions in the use of their software. It is often hard to tell whether behaviour by a firm is anti-competitive or simply competitive.
The Arreda-Turner rule states that the firm is anti-competitive if its price is below marginal cost (i.e. making deliberate losses so as to steal consumers from the entrant to the incumbent). There are generally two core models reflecting firms strategies in anti-competitive behaviour. The Long Purse argument says that the incumbent (monopolist) has more money and can take losses for a greater period when lowering its price. An entrant into the market will exit as soon as the monopolist lowers its price, since it knows it cannot survive. Knowing that this is a possible strategy, a potential entrant would choose not to enter. The second is the Kreps Wilson "Chain Store Paradox" model. In this model, the incumbent will drive out the first firm that attempts to enter with lower prices, therefore creating a reputation and discouraging others from wanting to enter in the future.
Kreps and Wilson
The Kreps Wilson model is one of the most widely praised game theoretical models to date. Even though it is 30 years old it is still used in modern analysis.
A potential entrant has a choice of whether to enter into the industry or not. This decision is based on its belief about whether the monopolist will fight entry or accept entry. A monopolist that fights entry (i.e. by lowering prices) is known as a strong monopolist and a monopolist that accepts entry is known as a weak monopolist.
Conditional on an entrant entering, the monopolist has a choice of whether to fight or accept.
The full proof is in a sequential equilibrium paper but the conclusion is as follows:
If the entrant believes that the monopolist is weak and therefore has a probability of fighting entry less than a half.
- In the early stages of the game, entrants do not enter as the monopolist will fight
- In the later stages of the game the monopolist accepts entry with a positive probability. In particular, as it knows that the game will end soon - it considers accepting entry because it becomes too expensive to fight entry. When firms enter the monopolist has the chance to prove its strength. In this case if the monopolist accepts once, its reputation is lost forever.
- In the early stages of the game, entrants do not enter as the monopolist will fight. This period last longer than the case where the entrant believes the monopolist is weak.
- In the later stages of the game, an entrant enters with a positive probability and the monopolist fights with a positive probability.
The highlighted yellow line is the Nash equilibrium. The horizontal part reflects where the monopolist will always fight and therefore there is no entry. North east of the intersection with the curved line, the monopolist enters with a positive probability, In equilibrium, the monopolist is indifferent between fighting and accepting entry and the potential entrant is indifferent between entering and staying out.
It gives a strategy of each the monopolist and the entrant whereby neither player is willing to deviate from their strategy i.e. it is a Nash equilibrium.
Celebrity vs. Paparazzi
The story of the celebrity and the paparazzi is very similar. In the early stages of fame, the celebrity will fight the paparazzi regardless of whether the celebrity is aggressive (strong) or not (weak). In the later stages of the game when fame is fading and the celebrity is nearing the end of his/her career it will accept entry by the paparazzi with positive probability. If the celebrity is aggressive than this stage of accepting paparazzi into its private life will come later. Also, once a celebrity has accepted entry of a paparazzi into its private life - the celebrity has lost its reputation and the paparazzi is led to believe that any further attempted entry into the celebrity's private life will be accepted by the celebrity. In the last years of fame, the celebrity will always accept entry.
This is displayed graphically below:
The story of the celebrity and the paparazzi is very similar. In the early stages of fame, the celebrity will fight the paparazzi regardless of whether the celebrity is aggressive (strong) or not (weak). In the later stages of the game when fame is fading and the celebrity is nearing the end of his/her career it will accept entry by the paparazzi with positive probability. If the celebrity is aggressive than this stage of accepting paparazzi into its private life will come later. Also, once a celebrity has accepted entry of a paparazzi into its private life - the celebrity has lost its reputation and the paparazzi is led to believe that any further attempted entry into the celebrity's private life will be accepted by the celebrity. In the last years of fame, the celebrity will always accept entry.
This is displayed graphically below:
