CHAPTER 14 Regulation
Discussion Questions
4. As the question states, there is great uncertainty and disagreement about this topic. But one aspect of predatory pricing is that it is, and is intended to be, temporary. Its purpose is to drive out (and keep out) rivals, after which time the predatory pricer can raise prices and enjoy higher-than-normal profits. It follows that a court should not find a price predatory and illegal simply because it is lower than other competitors can meet, if the low price can be sustained by the company. In such a case, consumers benefit in the long run. To distinguish between predatory pricing and nonpredatory profit maximization, one should identify potential barriers to entry, determine if the market is contestable, estimate the relevant demand elasticities, estimate the firm’s average and marginal cost curves, and identify the number of potential and actual competitors. It is difficult, but important to distinguish between predatory pricing and pricing decisions based on cost advantages or price discrimination.
5. Students will have their own criteria for fairness. But it is helpful to approach this question by thinking of what the alternative is to having urban telephone users subsidize rural telephone users. One alternative is that rural rates would be higher than urban rates—this could be seen as fairer (because rural average costs are higher than urban) or less fair (because people are being charged different prices for the same service). One consequence of higher rural rates might be that some rural households would choose to go without telephone service, and students may feel this is an undue burden. Another alternative, however, is that rural rates could be kept at the urban level by means of a government subsidy—this would impose the burden of the subsidy upon all taxpayers, in proportion to their capacity to pay income taxes, rather than upon urban phone users, and students may feel that this is more fair.
6. Rational consumers should consider any fall in price to be a good development, because it increases their utility. They are in no way harmed by the increase in the company’s profitability. In fact, it may well have been the incentive of the increased profits that led the firm to figure out how to reduce costs and prices.