Predatory pricing with the existence of network externalities in the laboratory

Abstract

This paper reports on data taken from an experiment confirming the existence of predatory pricing in the presence of network externalities, where the technology of one firm (seller A) is superior to the other (seller B). Subjects were recruited to play the game with computer simulated buyers. They made entry decisions as well as both price and quantity decisions in a posted-offer market institution scenario. The Nash equilibrium is that seller A will predate and that seller B will not predate. The experiment looked at both a single-market design and a multi-market design, the latter allowing the reputation of superior sellers to develop, and also providing inferior sellers with an opportunity to escape to another market. The observations from both designs overwhelmingly support the presence of predatory pricing, although a single-market design is not as effective at deterring potential entrants, when compared to a multi-market design. © 2007 Elsevier B.V. All rights reserved.