Recent Developments in China, the US and Europe
Edited by Michael Faure and Xinzhu Zhang
Chapter 13: The Legal Regime Preventing Predation in the People’s Republic of China: A Law and Economics Analysis
Stefan Weishaar 13.1 INTRODUCTION Predatory pricing is a practice commonly defined as setting prices so low that competitors cannot sustain their operations and are driven off the market. Once competitors have left the market, the incumbent enterprise is able to raise prices towards monopoly levels and to recoup its losses. Declining prices and market exit of inefficient competitors is an expected and desired result of strong price competition. Yet taking advantage of a favourable market position to drive equally efficient competitors out of business is not welfare enhancing and is generally forbidden by competition laws as being abusive. Distinguishing between welfare enhancing competition and predation is a non-trivial task. In the economics literature there has been fierce debate about whether predation can be profitable and which practical rules could be used by courts to distinguish fierce and welfare enhancing price competition from welfare reducing predatory practices. It is feared that misguided rules would deter more efficient firms from engaging less efficient competitors and from fighting them off the market under circumstances that meant that charges of predation may be brought against them. In this context efficient legal rules must strike a delicate balance between minimizing error costs of wrongly convicting or not convicting companies (allegedly) engaged in predatory abuses and keeping enforcement costs at a sufficiently low level. While the scope of this chapter is too limited to give a complete overview of the debate on this issue, Section13.2 sketches the economic discussion in general terms. It reviews both the...
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