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Article
Hunting Unicorns
Journal of Law and Economics (2019)
  • Aaron Edlin
Abstract
We study the effects of above-cost exclusionary pricing and the efficacy of three policy responses by running 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. While both policies have less competitive outcomes after entry than laissez-faire does, they nevertheless both increase consumer welfare. For Edlin’s proposal this consumer gain is at the cost of lower overall welfare from attracting inefficient entrants, while for Baumol, overall welfare is comparable to current U.S. policy.
Publication Date
Fall December 4, 2019
Citation Information
Aaron Edlin. "Hunting Unicorns" Journal of Law and Economics (2019)
Available at: http://works.bepress.com/aaron_edlin/116/