Predatory pricing

Definition

Predatory pricing is a strategy where a company sets its prices extremely low, often below its costs, with the intent of driving competitors out of the market. This tactic is often seen as anti-competitive because it can create monopolistic conditions, where the predator eliminates rivals and then raises prices once it has secured a dominant position. This practice raises significant concerns regarding market fairness and consumer choice.

5 Must Know Facts For Your Next Test

1. Predatory pricing is considered illegal under antitrust laws in many jurisdictions because it undermines fair competition.
2. Companies engaging in predatory pricing may incur short-term losses as they lower their prices to drive out competitors.
3. This practice can lead to a monopoly, where the dominant firm can then raise prices, harming consumers in the long run.
4. Predatory pricing cases can be complex and challenging to prove, requiring clear evidence that the intent was to harm competition.
5. Regulatory authorities often scrutinize pricing strategies closely to prevent anti-competitive practices that could distort the market.

Review Questions

• How does predatory pricing affect market competition and consumer choices?
  • Predatory pricing affects market competition by allowing a dominant firm to use extremely low prices to drive out rivals, reducing the number of competitors in the market. This can lead to a lack of choices for consumers as fewer firms remain to offer products or services. Once competitors are eliminated, the dominant firm may raise prices, ultimately harming consumers by limiting their options and forcing them to pay more.
• Discuss the legal implications of predatory pricing under antitrust laws and how it is regulated.
  • Under antitrust laws, predatory pricing is deemed an anti-competitive practice that can result in legal repercussions for companies that engage in it. These laws are enforced to protect competition and ensure a fair marketplace. Regulatory bodies analyze pricing strategies and may investigate companies suspected of using predatory pricing tactics, requiring them to justify their pricing decisions or face penalties. The complexity of proving predatory pricing cases often lies in demonstrating intent and the long-term impacts on competition.
• Evaluate the long-term consequences of predatory pricing on market dynamics and consumer welfare.
  • The long-term consequences of predatory pricing can significantly alter market dynamics by establishing monopolistic conditions where one firm controls the majority of market share. This not only diminishes competition but also leads to higher prices and fewer choices for consumers once competitors are driven out. Moreover, such practices may discourage new entrants into the market due to perceived risks of being priced out, ultimately stifling innovation and reducing overall consumer welfare in the economy.

Related terms

monopoly: A market structure where a single seller dominates the market, resulting in limited competition and potentially higher prices for consumers.

antitrust laws: Legislation designed to promote competition and prevent monopolies by regulating anti-competitive practices, including predatory pricing.

price discrimination:

The practice of charging different prices to different customers for the same product or service, which can be a form of predatory pricing if used to eliminate competition.