Predatory pricing

Definition

Predatory pricing is a strategy where a company sets prices extremely low, often below cost, with the intent to eliminate competition and establish a monopoly. This aggressive pricing tactic can create a significant barrier for new entrants in the market and can lead to long-term consequences such as reduced market competition and higher prices once competitors are driven out. Companies may use predatory pricing to gain market share quickly and secure a dominant position, but it raises ethical concerns and legal scrutiny.

5 Must Know Facts For Your Next Test

1. Predatory pricing can lead to legal actions against companies, as it is often considered an anti-competitive practice under various antitrust laws.
2. This pricing strategy is typically employed by larger companies with deep pockets, allowing them to sustain losses for longer periods than smaller competitors.
3. Once competitors are driven out or significantly weakened, the company may increase prices to recoup losses, often resulting in higher prices for consumers.
4. Predatory pricing is difficult to prove legally, as courts require clear evidence of intent to harm competition rather than just aggressive pricing tactics.
5. Governments and regulatory bodies monitor predatory pricing practices to maintain fair competition in the market and protect consumer interests.

Review Questions

• How does predatory pricing influence competition in a market?
  • Predatory pricing significantly influences competition by allowing larger firms to set prices so low that smaller competitors cannot sustain their operations. This often leads to the exit of these smaller firms from the market, resulting in reduced competition. Once the competitive landscape is altered, the predatory firm may then increase prices, effectively eliminating price competition that previously existed. This creates an environment where consumers face fewer choices and potentially higher prices in the long run.
• Discuss the legal implications of predatory pricing in relation to antitrust laws.
  • Predatory pricing has serious legal implications under antitrust laws because it undermines healthy market competition. Regulatory bodies scrutinize such practices, as they may violate laws designed to promote fair competition and prevent monopolies. Companies found guilty of engaging in predatory pricing can face hefty fines and sanctions. The challenge lies in proving that low prices were set with the intent to eliminate competition rather than simply responding to market conditions.
• Evaluate the ethical considerations surrounding predatory pricing and its impact on consumers and markets.
  • The ethical considerations surrounding predatory pricing revolve around its potential harm to consumers and market dynamics. While it may initially benefit consumers through lower prices, the long-term consequences include reduced competition, fewer choices, and eventual price increases once competitors are eliminated. Additionally, this practice raises questions about corporate responsibility and fairness in the marketplace. Ultimately, the negative implications for both consumers and competitors highlight the need for regulatory oversight and ethical business practices.

Related terms

Monopoly: A market structure where a single seller controls the entire supply of a product or service, allowing them to dictate prices and output.

Market Share:

The portion of a market controlled by a particular company, often measured by sales volume or revenue relative to competitors.

Price Discrimination: The practice of charging different prices to different customers for the same product or service based on their willingness to pay.