In search of predatory pricing strategy in the network industry : a multiple period experiment.

Abstract

This paper reports data from an experiment confirming the existence of predatory pricing in the presence of network externalities when the technology of competing firms are identical. An experiment was conducted based on a seven-period and one-market design. Subjects were recruited and assigned a role as seller before they were paired together randomly and played the game for two rounds. Sellers were classified into superior and inferior sellers where sellers’ superiority came from buyers’ willingness to pay. Buyers were simulated and had different, pre-programmed preferences over the goods offered by two sellers. In each period, subjects had to make an entry decision and a price decision in a posted offer market institution. The sub-game perfect Nash equilibrium is for superior seller to engage in predatory pricing and for inferior seller not to enter the market. The observations strongly support the presence of predatory pricing. Additionally, the predatory pricing strategy was quite effective in driving rivals out. Unexpectedly, predation was evidently pursued by both superior and inferior sellers, and inferior sellers also had a chance to dominate the market. It can be concluded that predatory pricing strategy exists in the market that exhibits network externalities, and this strategy is quite powerful in elminating competitors.