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Journal of Competition Law and Economics Advance Access originally published online on June 28, 2007
Journal of Competition Law and Economics 2007 3(4):609-624; doi:10.1093/joclec/nhm013
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© The Author (2007). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

ENTRY, PRODUCT LINE EXPANSION, AND PREDATION

Vincenzo Denicolò *, Michele Polo ** and Piercarlo Zanchettin {dagger}

In the Tourist-Caronte case in Italy, the incumbent, Tourist-Caronte, reacted to entry by entrant Diano by starting to supply a "damaged good" in the sense theorized by Deneckere and McAfee in 1996. We argue that in principle this strategy can be predatory, but it can also be an innocent response to entry. Specifically, the strategy of damaging the good leads to fiercer competition in the low segment of the market, which reduces the rents that the incumbent earns in the high segment, but may allow the incumbent to steal some of the entrant's rents. If this business stealing effect in the low segment of the market is sufficiently strong, the incumbent may find it profitable to expand its product line after entry, even if it does not have any predatory intent. We discuss the welfare effects of this strategy, and we contrast it with predation.

* Professor of Economics, University of Bologna, Italy. E-mail: vincenzo.denicolo{at}unibo.it. An earlier version of this paper was presented at the CRESSE conference in Corfù in July 2006 and is included in the forthcoming Athens University of Economics and Business conference volume, Abuse of Dominance (Yannis Katsoulakos, ed., 2007).

** Professor of Economics, Bocconi University, Milan, Italy and Fellow, Innocenzo Gasparini Institute for Economic Research. E-mail: michele.polo{at}uni-bocconi.it. The author acted as economic expert for Tourist-Caronte.

{dagger} Lecturer in Economics, University of Leicester, Leicester, United Kingdom. E-mail: pz11{at}le.ac.uk. An earlier version of this paper was presented at the CRESSE conference in Corfu in July 2006 and is included in the forthcoming Athens University of Economics and Business conference volume, Abuse of Dominance (Yannis Katsoulakos, ed., 2007).


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