Predatory Pricing

Definition

Predatory pricing is a pricing strategy where a company sets its prices at an extremely low level, often below cost, in order to drive competitors out of the market and establish a monopoly. The goal is to eliminate competition and then raise prices to recoup the losses incurred during the predatory period.

5 Must Know Facts For Your Next Test

1. Predatory pricing is often used by large, dominant firms to drive smaller competitors out of the market and maintain their market power.
2. Predatory pricing can be difficult to identify and prove, as it may be challenging to determine if the low prices are genuinely aimed at driving out competitors or are simply a result of healthy competition.
3. Governments may use antitrust laws to prevent and punish predatory pricing, as it is considered an anticompetitive practice that harms consumers in the long run.
4. Predatory pricing is more likely to occur in markets with high barriers to entry, where it is difficult for new firms to enter and challenge the dominant player.
5. The success of a predatory pricing strategy depends on the dominant firm's ability to sustain losses during the predatory period and then recoup those losses by raising prices once competitors have been driven out.

Review Questions

• Explain how predatory pricing relates to the concept of a monopoly and the arguments in support of restricting imports.
  • Predatory pricing is a strategy used by dominant firms to establish a monopoly by driving out competitors, often through the use of extremely low prices. In the context of arguments in support of restricting imports, predatory pricing by foreign firms could be seen as a threat to domestic industries, as it could make it difficult for domestic firms to compete and lead to the loss of domestic jobs and industry. Governments may use trade policies, such as tariffs or quotas, to restrict imports and protect domestic industries from the effects of predatory pricing by foreign competitors.
• Describe the role of antitrust laws in addressing predatory pricing and how they relate to the arguments for restricting imports.
  • Antitrust laws are designed to promote competition and prevent monopolistic practices, such as predatory pricing. In the context of arguments for restricting imports, antitrust laws could be used to address concerns about predatory pricing by foreign firms. If a foreign firm is engaging in predatory pricing to drive out domestic competitors, antitrust authorities may intervene to prevent this anticompetitive behavior. However, the use of trade policies, such as tariffs or quotas, to restrict imports may also be seen as a way to protect domestic industries from the effects of predatory pricing by foreign competitors, even if it goes against the principles of free trade.
• Analyze how barriers to entry in a market can enable predatory pricing strategies and how this relates to the arguments for restricting imports.
  • High barriers to entry in a market can make it difficult for new firms to enter and challenge the dominant player, which can enable predatory pricing strategies. In the context of arguments for restricting imports, high barriers to entry in domestic industries could make them more vulnerable to predatory pricing by foreign competitors. If domestic firms face significant barriers to entry, such as high start-up costs or economies of scale, they may be less able to compete with foreign firms engaging in predatory pricing. In this scenario, restricting imports through trade policies could be seen as a way to protect domestic industries and preserve competition, even if it goes against the principles of free trade.

Related terms

Monopoly:

A market structure where a single seller dominates the entire market for a particular good or service, allowing the monopolist to set prices and restrict output.

Barriers to Entry: Factors that make it difficult for new firms to enter a market and compete with existing firms, such as high start-up costs, economies of scale, or government regulations.

Antitrust Laws: Laws designed to promote competition and prevent monopolistic practices, such as price-fixing, mergers that reduce competition, and predatory pricing.