Predation, Reputation, and Entry Deterrence

Economists often argue that predatory practices are irrational, since there exist cheaper or more certain means to gain or maintain a monopoly. Our game-theoretic, equilibrium analysis suggests that if a firm is threatened by several potential entrants, then predation may be rational against early entrants, even if it is costly when viewed in isolation, because it yields a reputation which deters other entrants. Asymmetric information plays a crucial role in our analysis, since it provides the rationale for entrants to base their expectations of the firm’s future behavior on its past actions. The analysis also suggests methods to treat general reputational phenomena.