The Subtle Virtues of Prohibiting Excessive Pricing by Dominant Firms.

The aim of this paper is to show that the case against the prohibition of excessive pricing is far from being clear-cut, for reasons ignored by the current literature and case law. We show how, contrary to the conventional view in the literature and case law, excessive prices do not attract new entry, and therefore are not self-correcting. Moreover, in contrast to the conventional view, we show that the prohibition of excessive pricing may encourage, rather than discourage, entry. We also claim that the difficulty of implementation of a prohibition on excessive pricing could be addressed by focusing on a single reliable benchmark, such as substantial post-entry price cuts by dominant firms. We also show that the concern that the regulation of excessive prices will harm ex ante investment incentives is relevant only for cases in which (natural) entry barriers are high.