Predatory pricing

Definition

Predatory pricing is a strategy where a company sets its prices extremely low with the intent to eliminate competition or deter new competitors from entering the market. This aggressive pricing tactic can lead to short-term financial losses for the predatory firm but is aimed at long-term gains by establishing market dominance. It often raises legal and ethical concerns, as it can create monopolistic environments detrimental to consumers and other businesses.

5 Must Know Facts For Your Next Test

1. Predatory pricing can result in temporary financial losses for the company employing the strategy, as they may sell products below cost to drive out competitors.
2. Once competitors have been eliminated, the predatory firm can raise prices significantly, which can harm consumers in the long run.
3. This practice is often scrutinized under antitrust laws, which aim to prevent anti-competitive behavior in markets.
4. Identifying predatory pricing can be complex, as it requires analyzing pricing patterns over time and the intent behind those prices.
5. Legal action against predatory pricing often depends on proving that the pricing strategy was intended to harm competition rather than just a legitimate business tactic.

Review Questions

• How does predatory pricing impact market competition and consumer choice?
  • Predatory pricing can significantly reduce competition by forcing smaller rivals out of the market due to unsustainable low prices. As these competitors disappear, the remaining firm can then raise prices, leading to fewer choices for consumers. This process undermines a healthy competitive environment and can result in monopolistic behaviors that harm consumers through higher prices and reduced innovation.
• What are some legal implications of predatory pricing under antitrust laws?
  • Predatory pricing is scrutinized under antitrust laws because it can stifle competition and create monopolies. If a company is found to be engaging in this practice, it may face legal consequences such as fines or restrictions on its business practices. Proving that predatory pricing occurred requires demonstrating both the intent to eliminate competition and that prices were set below costs without justification.
• Evaluate the long-term consequences of predatory pricing on an industry’s health and its overall economic environment.
  • In the long run, predatory pricing can lead to decreased industry health by creating barriers for new entrants and reducing competition. This might result in higher prices for consumers once the dominant player increases rates after eliminating rivals. Additionally, industries dominated by one or two firms often see reduced innovation and lower-quality products, as there are fewer incentives for improvement when competition is absent. The economic environment becomes less dynamic, with potential negative impacts on job creation and consumer welfare.

Related terms

Price War: A competitive situation where rival companies continuously lower prices to outdo each other, often leading to reduced profit margins.

Market Share: The portion of a market controlled by a particular company or product, often a key objective in competitive strategies like predatory pricing.

Antitrust Laws:

Legislation enacted to promote competition and prevent monopolistic practices, often invoked against predatory pricing strategies.