Predatory Pricing and Information Aggregation in Markets with a Common Value

Abstract

We study a duopoly where the two price setting firms have symmetric information. The firms produce substitute goods with a state dependent common value. The information that is available to both firms about the unknown state of nature is also available to the consumers, who also have access to additional private information. Each consumer has a unit demand and evaluates each of the substitute goods based on the information available to her. Although firms have the same information predatory pricing may still prevail with one firm, possibly the inferior one, setting the price low enough to drive the other firm out of the market. We show that predatory pricing holds if the signal distribution satisfied a novel condition that we call Vanishing Likelihood.