Raising Rivals’ Costs

Abstract RRC analysis principally focuses on a market with a dominant firm that is assumed to have significant market power, independent of any cost-raising strategies. The fundamental insight of the RRC theory is that increases in rivals’ marginal costs will lead the rivals to reduce their output relative to an initial equilibrium level. The dominant firm also experiences an increase in marginal cost that, other things equal, reduces its profits. RRC may not be profitable and, as a matter of economic theory, the net consumer-welfare effects of profitable cost-raising strategies are ambiguous. It is important to understand this theoretical ambiguity, particularly when evaluating the potential for vertical mergers to be anticompetitive.