A court case alleges that a manufacturer set prices below cost for a full five years as a way to force a rival out of business. The court cannot directly observe the manufacturer's marginal cost of production. In the debate that follows, one economist argues that the manufacturer has acted illegally but another economist disagrees and maintains that the manufacturer in question has done nothing illegal. (a) Define and explain the term 'predatory pricing'. Is predatory pricing a credible strategy when the predator and the prey have identical (marginal and average) costs? Identify and explain any assumptions you need to make to argue for credibility. (b) Discuss how antitrust authorities might measure and detect predatory pricing. Hence, explain why a court that cannot observe marginal cost might still rule that predatory pricing has occurred. (c) Explain the meaning of the term 'rule of reason'. Do you agree that predatory pricing cases should be decided on a 'rule of reason' basis? Explain.

A court case alleges that a manufacturer set prices below cost for a full five years as a way to force a rival out of business. The court cannot directly observe the manufacturer's marginal cost of production. In the debate that follows, one economist argues that the manufacturer has acted illegally but another economist disagrees and maintains that the manufacturer in question has done nothing illegal. (a) Define and explain the term 'predatory pricing'. Is predatory pricing a credible strategy when the predator and the prey have identical (marginal and average) costs? Identify and explain any assumptions you need to make to argue for credibility. (b) Discuss how antitrust authorities might measure and detect predatory pricing. Hence, explain why a court that cannot observe marginal cost might still rule that predatory pricing has occurred. (c) Explain the meaning of the term 'rule of reason'. Do you agree that predatory pricing cases should be decided on a 'rule of reason' basis? Explain.