Exclusionary pricing in markets with interdependent demands

- This paper provides a theoretical rationale for exclusion in markets with interdependent demands.
- The proposed model captures the main features of a recent antitrust case in the UK-the Napp case.
- It is shown that when exclusion occurs, it is always socially optimal.
- In addition, the model always predicts the existence of inefficient entry.
- The paper does not find support for the idea that Napp did breach competition laws.

In this paper I use a simple model to study the competitive effects of exclusionary pricing involving two markets related by a positive demand externality. It is shown that below-cost pricing on one of these markets can allow an incumbent firm to exclude (from both markets) a more efficient rival which does not have a customer base yet. However, when exclusion occurs, it is always socially optimal. In addition, under some circumstances, there is inefficient entry: the entrant wins both markets while the social optimum would require the incumbent to win them.