doi:10.1016/j.infoecopol.2007.01.005 
Copyright © 2007 Elsevier B.V. All rights reserved.
Predatory pricing with the existence of network externalities in the laboratory
Yingyot Chiaravutthi
, a, 
aMahidol University International College, Mahidol University, 999 Buddhamonthon, Salaya, Nakhonpathom 73170, Thailand
Received 27 December 2005;
revised 12 January 2007;
accepted 15 January 2007.
Available online 30 January 2007.
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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.
Keywords: Predatory pricing; Network externalities; Entry deterrence; Posted-offer market; Firm strategy
JEL classification codes: D21; L11; L15; L40
Fig. 1. Demand and supply schedules. Note: Supply, demand without network externalities, and demand with network externalities are represented by bold lines, thin lines, and thin dotted lines, respectively.
Fig. 2. Payoff matrix of the predation game.
Fig. 3. Price offers by seller As in the first period of rounds 1–10. Note: SD(upper) and SD(lower) are two standard deviations from the actual mean of each round.
Fig. 4. Price offers by seller As in the first period of rounds 11–20. Note: SD(upper) and SD(lower) are two standard deviations from the actual mean of each round.
Table 1.
Demand schedule for buyersa
a Buyers’ WTP when a seller sells less than 20 units (the second column of Table 1) are replicated from Capra et al.’s experiment.
Table 2.
Cost schedules for the two types of sellers
Table 3.
Possible outcomes of the game and their payoffs
Note: Payoffs are based on the assumption that each seller maximizes profits by setting price in order to obtain network benefits or monopoly benefits, whichever is greater. Seller A engages in predatory pricing by pricing at $2.79 and offers 10 units. Seller B engages in predatory pricing by pricing at $2.59, and also offers 10 units. As a result, when both sellers A and B engage in predatory pricing, seller B may win the whole market in the first period, but not in the second period if seller A enters (because seller B has to make up for the loss in the first period). If neither A nor B engages in predatory pricing in the first period, each earns competitive profits ($1.57, which is the average of $1.40 and $1.75 per period).
Table 4.
Numbers of strong type I, type II, type III and type IV predatory pricing during rounds 1–10
Note: There was no evidence of weak type I predatory pricing in this experiment. The numbers in parentheses represent the numbers of successful predations. Successful predation is defined as one of the four types of predatory pricing in the first period, with no entry by another firm in the second period.
Table 5.
Numbers of strong type I, type II, type III, and type IV predatory pricing during rounds 11–20
Note: There was no evidence of weak type I predatory pricing in this experiment. The numbers in parentheses represent the numbers of successful predations. Successful predation is defined as one of the four types of predatory pricing in the first period, with no entry by another firm in the second period.
Table 6.
Results from the three-market design
Note: Offer quantities are shown in parentheses. There was no evidence of other types of predatory pricing other than strong type I and type III.
a Represents type III predatory pricing.
b Represents strong type I predatory pricing.
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