In a world of rising technology, predators come in all shapes and sizes. Physical predators, like grizzly bears and ax-murderers, are easy to identify. But- BEWARE! - the type of predator that you are most likely to confront may be lurking in the shadows of a cubicle near you.
The European Commission accused Wanadoo, an internet affiliate of France Telecom, of abusing its market power by discouraging entrants. At the early stages of high-speed internet development, Wanadoo’s market share was very high (with eight times more subscribers than its next competitor.) Since the internet industry requires enormous sunk costs, Wanadoo recognized that its pricing behavior during the development phase was critical to long-term market structure. Under these circumstances, it is clear that when Wanadoo initially charged extremely low prices, it was willing to forgo current profits so that it could drive potential competitors out. If they were successful, they would earn monopolistic profit in the second period. By actually charging these low prices, Wanadoo confirmed its credibility.
Luckily (for consumers), the corporate Crocodile-hunter came to the rescue in this predator tale. The Commission proved that Wanadoo’s prices didn’t even cover its marginal costs and slapped the company with a 13.4-million-dollar fine. Whatcha gonna do now, Wanadoo?
Posted by: Caryl Huynh, Meghan Magennis, Chris Coyle, Lance Wang
1 comment:
I did a little research as to how ISPs operate and found that, although there are sunk costs involved, it is not an industry that requires - for example - the same range of sunk costs as a wireless phone company. ISPs need Points of Presence (PoPs) to initiate a connection to the internet, and sometimes have ownership to actual infrastructure (physical optical cables - which is high cost) but many own a small portion of this cable and then pay other "upstream ISPs" for use of their cable. An ISP, however, could own no actual infrastructure and could instead pay premiums to upstream ISPs and almost completely eliminate start-up costs. They would, however, have much higher marginal costs as they would be paying more per customer for use of other's networking infrastructure. In this case, if a company like Wanadoo was charging low prices to deter entrants it would not be feasible to then raise prices because these higher prices could warrant profit for a company who could rent infrastructure to enter with low sunk costs. So really, as far as consumers are concerned, they receive a product at an incredibly low price temporarily (below Wanadoo's MC) and later if Wanadoo raises its prices there will be competitors to undercut the increase in prices. That being said, however, under law it is illegal to price at lower than MC and the fine was warranted. But I personally don't think such a fine is deserved.
Comments by Patrick Giesecke, Melissa Barry, Jonathan Sutton
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