information:classification
Rules governing price increases after predation

William Baumol proposed a long-term rule seeking to avoid full reliance on cost-based tests to determine predatory pricing. Baumol's rule involves requiring any price cut made in response to entry to continue for a five-year period after the exit of the entrant (i.e., if an incumbent firm cuts its price to drive out an entrant, the incumbent firm is prevented from increasing price for five years). This rule significantly diminishes the incentive of a firm to engage in predatory pricing since the predatory firm cannot reap the benefits of its anti-competitive behavior (monopoly profits) during the five-year period. Baumol's proposed rule is not absolute, however, it does offer the predator some freedom to raise its post-exit price if the price increase is justified by demonstrable changes in the firm's costs or market demand.