A Dynamic Model of Predation

Résumé

We study an infinite-period dynamic predation model in which a dominant firm can either accommodate a weak rival or drive it out of the market. When the weak rival exits a new rival firm is born with some positive probability. We characterize the Markov perfect equilibria of the model and show that predation is an equilibrium strategy only when it is accompanied by a commitment by the dominant firm to also deter all future entry into the market. Predation is more profitable than accommodation for the dominant firm and may benefit consumers if they are relatively impatient and if the probability that a new rival will be born once the existing weak rival exits is high. (With Yossi Spiegel)