Predatory Pricing

Definition

Predatory pricing is a pricing strategy where a company sets its prices extremely low, often below cost, with the intention of driving competitors out of the market. This tactic can create an unfair competitive advantage by temporarily undercutting rivals, making it difficult for them to sustain their businesses. Eventually, once competition diminishes, the predatory pricer can raise their prices to recoup losses and increase profit margins.

5 Must Know Facts For Your Next Test

1. Predatory pricing can be considered illegal in many jurisdictions as it undermines fair competition and can lead to monopolistic practices.
2. The goal of predatory pricing is typically to eliminate competition, which can ultimately harm consumers in the long run by reducing choices and increasing prices.
3. Companies engaging in predatory pricing may incur short-term losses, but they expect long-term gains from reduced competition.
4. It can be challenging to prove predatory pricing since it requires demonstrating intent to harm competitors and a likelihood of recouping losses.
5. Predatory pricing is often associated with larger firms that can afford to sustain losses over time to eliminate smaller competitors from the market.

Review Questions

• How does predatory pricing differ from legitimate competitive pricing strategies?
  • Predatory pricing differs from legitimate competitive pricing strategies as it involves setting prices below cost with the intent of harming competitors, while legitimate strategies focus on competitive advantages like quality or customer service. Legitimate strategies aim to attract customers without undermining the market's competitive integrity. In contrast, predatory pricing can lead to monopolies, ultimately harming consumers when competition is reduced.
• What are the potential legal ramifications for a company that engages in predatory pricing?
  • Companies that engage in predatory pricing may face legal challenges under antitrust laws designed to protect fair competition. These laws can result in hefty fines, sanctions, or even forced changes in business practices. Additionally, a company's reputation may suffer, leading to consumer distrust and loss of business in other areas due to negative publicity surrounding unethical practices.
• Evaluate the impact of predatory pricing on market dynamics and consumer behavior in both the short and long term.
  • In the short term, predatory pricing can lead to lower prices for consumers, which might seem beneficial; however, this strategy often results in reduced competition as smaller companies are driven out of the market. In the long run, once competition has diminished, the remaining dominant firm can raise prices significantly. This shift harms consumers by limiting their options and forcing them to pay higher prices for products or services due to a lack of competitive alternatives.

Related terms

Price War: A price war occurs when competing companies continuously lower their prices to attract customers, often leading to reduced profits for all players involved.

Market Share: Market share refers to the percentage of an industry's sales that a particular company controls, often used as a measure of competitiveness and market dominance.

Antitrust Laws: Antitrust laws are regulations that promote competition and prohibit monopolistic practices, including predatory pricing tactics that harm consumer interests.