Final Reply to Steve Salop

Dan Crane —  14 June 2013

Dan’s final post responding to Steve’s latest postOther posts in the series: DanSteveDanSteveDan, and Thom.

It seems that it’s time to wind down and that a further tit-for-tat might not be productive, so I’ll close with a final comment on the first point that Steve makes—one that may undergird much of our disagreement.  Steve asserts that “the $71 payment would fail a test of comparing the rival’s price and cost, but that it is not the test.  The test compares the monopolist’s price and cost.”  That would only be true if we were applying an unmodified predatory pricing rule to loyalty rebates—a position that I’ve never advocated in these posts are elsewhere.  If we applied the attribution test that Steve and I have been assuming, the question would be whether the rival could profitably remain in the market given the price it would have to charge to neutralize the effect of the monopolist’s rebate operating at the contestable share and scale.  And, since Steve and I have now agreed that using the rival’s rather than the monopolist’s costs is admissible if we don’t insist on an EEC component, then my statement that the $71 could fail the price-cost screen is accurate.  But if the effective price the rival would have to meet were $69 and not $71, there wouldn’t be any foreclosure—which is why the screen makes sense.

Thanks, Steve, for this impromptu exchange.  I hope that both our fair points and grievous errors have been educational to ourselves and to others.