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Journal of Competition Law and Economics Advance Access originally published online on October 21, 2008
Journal of Competition Law and Economics 2009 5(2):249-268; doi:10.1093/joclec/nhn033
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© The Author (2008). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

ARE EXCESSIVE PRICES REALLY SELF-CORRECTING?

Ariel Ezrachi * and David Gilo **

Correspondence: E-mail: ariel.ezrachi{at}law.ox.ac.uk

JEL: K21, L4

Excessive pricing by a dominant firm is considered as one of the most blatant forms of abuse. Despite this, competition authorities frequently refrain from intervening against excessive prices. The non-interventionist approach is based, among others, on the premise that high prices encourage new entry and thereby should be feared less. According to this view, in many cases, excessive prices are likely to be competed away and make intervention redundant. This paper questions this conventional view and reconsiders whether excessive prices are indeed self-correcting. It illustrates how, in the majority of cases, excessive prices will not attract new entry of viable competitors, whether entry barriers are high or low. Furthermore, it shows how, at times, the prohibition of excessive prices may encourage, rather than discourage, entry. By doing so, this paper narrows and focuses the arguments against intervention. Accordingly, it concludes that if excessive pricing is not to be prohibited, it should not be because it is thought to be "self-correcting," but rather for reasons such as the need to stimulate investment or difficulties of implementation, which should be assessed on a case by case basis.

* Slaughter and May Lecturer in Competition Law, The University of Oxford.

** Associate Professor, Buchmann Faculty of Law, Tel Aviv University, Israel. E-mail: gilod{at}post.tau.ac.il. We wish to thank Yossi Spiegel, Patrick Rey, Yaron Yehezkel, John Vickers, participants at the 2007 American Law and Economics Association annual meeting, and participants at the Tel Aviv University Industrial Organization Workshop, for helpful discussions and comments. Views expressed in the article are the authors' own.


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