Predatory pricing

Definition

Predatory pricing is a pricing strategy where a company sets its prices extremely low, often below cost, with the intent to eliminate competition or create a monopoly. This practice can lead to market dominance, as competitors may be forced to lower their prices or exit the market altogether. The approach is often scrutinized under antitrust laws, which aim to maintain fair competition and prevent monopolistic behaviors.

5 Must Know Facts For Your Next Test

1. Predatory pricing can be difficult to prove in court, as companies often claim that their low prices are simply competitive tactics rather than an attempt to eliminate competitors.
2. This strategy is most common in industries with high fixed costs and low marginal costs, such as airlines or telecommunications, where dominant players can afford short-term losses.
3. If successful, predatory pricing can result in a monopoly, allowing the company to raise prices once competition has been eliminated.
4. Regulatory bodies may impose penalties on companies found guilty of predatory pricing, including fines and orders to change business practices.
5. Consumer protection advocates argue that predatory pricing can ultimately harm consumers by reducing choices in the long run when competition is stifled.

Review Questions

• How does predatory pricing impact competition in a market?
  • Predatory pricing impacts competition by allowing a company to set prices below cost, which can drive competitors out of the market. When rivals cannot sustain their business due to these low prices, they may be forced to either lower their prices drastically or exit the market altogether. This creates an environment where the predatory firm can achieve greater market share and potentially establish a monopoly, limiting consumer choices and stifling innovation.
• Discuss how antitrust laws address predatory pricing and the challenges involved in enforcement.
  • Antitrust laws aim to prevent predatory pricing by prohibiting unfair business practices that reduce competition. However, enforcing these laws poses challenges because proving intent behind pricing strategies is complex. Companies often argue that their low prices are part of normal competitive behavior rather than an attempt to harm competitors. This ambiguity makes it difficult for regulators to take action without clear evidence of malicious intent or significant harm to competition.
• Evaluate the long-term effects of predatory pricing on consumers and the market as a whole.
  • The long-term effects of predatory pricing on consumers and the market can be detrimental. Initially, consumers may benefit from lower prices; however, once competition is eliminated and a monopoly is established, prices may rise significantly. Additionally, the lack of competition can lead to reduced product variety and innovation. Over time, this can create an unhealthy market dynamic where consumer choices are limited and companies have less incentive to improve their offerings or services.

Related terms

Monopoly: A market structure where a single seller dominates the market, controlling prices and supply of a product or service.

Antitrust Laws: Regulations designed to promote competition and prevent unfair business practices that harm consumers or other businesses.

Price Discrimination: The practice of charging different prices to different consumers for the same product or service, often based on the consumer's willingness to pay.