Testing Whether Predatory Commitments are Credible

Abstract

Many recent game-theoretic models suggest that with asymmetric information it can be profitable for firms to acquire a reputation for toughness to discourage later entry. We identify institutional arrangements which firms must undertake if predatory commitments are to be credible. For example, simply hiring managers who value market share or output maximization is insufficient if managers can be removed whenever it actually becomes necessary to engage in predation. Firms must also make removing the manager more difficult. We find no evidence that allegedly predatory firms are organized as these game-theoretic models imply. If anything, the reverse seems to be frequently true.

JEL Classification: K21, K42, L1, L4