Research Seminar in Economics - Catherine Roux, "Competition Policy for Exclusionary Pricing: Experimental Evidence"

We study the effects of above-cost exclusionary pricing and the efficacy of three policy responses. We run a series of experiments involving a monopoly incumbent and a potential entrant. Our experiments show that under a laissez-faire regime, the threat of post-entry price cuts discourages entry, and allows incumbents to charge monopoly prices. Current U.S. policy (Brooke Group) does not help. In contrast, a policy suggested by Baumol (1979) lowers post-exit prices, while Edlin's (2002) proposal reduces pre-entry prices and encourages entry in the experiments. While both policies have less competitive outcomes after entry than Laissez-faire does, they nevertheless increase consumer welfare.