Predation
a) What is predation? What is the Chicago school criticism of predation and what is the counterargument to this criticism? Give four non-predatory reasons as to why firms respond aggressively to entry. Is there any evidence that can allow one to distinguish between a predatory and a non-predatory response to entry? Does predation reduce social welfare?
b) In the airline industry Northwest (i) responded to entry by dropping prices and adding capacity and (ii) responded to exit by raising prices and reducing capacity. Explain whether these actions consistent with non-predatory Cournot behavior, predation or both.
c) In the gas station industry the growth of market share of low cost supermarket chains resulted in the exit of 5000 gas stations and in a fall in the average gross margin. Explain whether this evidence is consistent with non-predatory Cournot behavior, predation or both?