Predatory Pricing

Definition

Predatory pricing refers to the practice of a dominant firm setting prices artificially low in order to drive competitors out of the market, with the intention of raising prices once the competition has been eliminated. This unethical pricing strategy aims to monopolize the market by undermining rivals and preventing new entrants.

5 Must Know Facts For Your Next Test

1. Predatory pricing is considered an unethical and anti-competitive pricing strategy, as it aims to eliminate rivals rather than compete on the merits of the product or service.
2. Dominant firms engaging in predatory pricing often price their products below their own cost of production, with the goal of forcing competitors to exit the market.
3. The practice of predatory pricing is illegal in many countries, as it violates antitrust laws and undermines the principles of free and fair competition.
4. Predatory pricing can lead to higher prices and reduced consumer choice in the long run, as the dominant firm seeks to recoup its losses and exploit its monopoly position.
5. Proving the existence of predatory pricing can be challenging, as firms may argue that their low prices are a result of genuine cost advantages or efforts to compete on the merits.

Review Questions

• Explain how predatory pricing relates to the ethical considerations in pricing (12.6 Ethical Considerations in Pricing).
  • Predatory pricing is considered an unethical pricing strategy because it involves deliberately setting prices below cost with the intent of driving competitors out of the market. This undermines the principles of fair competition and can lead to higher prices and reduced consumer choice in the long run, once the dominant firm has eliminated its rivals. Ethical pricing practices should focus on providing value to customers, not on using pricing as a weapon to eliminate competition.
• Analyze the potential impact of predatory pricing on the ethical issues in retailing and wholesaling (18.7 Ethical Issues in Retailing and Wholesaling).
  • Predatory pricing can have significant ethical implications for the retail and wholesale industries. By using low prices to drive out competitors, dominant firms in these sectors can effectively monopolize the market, leading to higher prices and reduced product selection for consumers. This can be seen as a violation of the ethical principles of fair competition and consumer protection. Additionally, the use of predatory pricing by large retailers or wholesalers may put smaller, independent businesses at a significant disadvantage, potentially leading to their demise and further consolidation of the industry.
• Evaluate the role of antitrust regulations in addressing the ethical concerns associated with predatory pricing.
  • Antitrust regulations play a crucial role in addressing the ethical concerns associated with predatory pricing. These laws and policies are designed to promote fair competition and prevent the formation of monopolies or other anti-competitive practices. By prohibiting the use of predatory pricing and other exclusionary tactics, antitrust regulations aim to protect consumers from the negative consequences of market dominance, such as higher prices, reduced choice, and stifled innovation. Effective enforcement of antitrust laws can help ensure that pricing decisions are made based on the merits of the product or service, rather than on the desire to eliminate competition and exploit a monopolistic position.

Related terms

Monopolistic Behavior: Monopolistic behavior involves actions taken by a dominant firm to maintain or increase its market power, often at the expense of consumer welfare.

Antitrust Regulations: Antitrust regulations are laws and policies designed to promote fair competition and prevent the formation of monopolies or other anti-competitive practices.

Marginal Cost Pricing: Marginal cost pricing is a pricing strategy where a firm sets the price of a product or service equal to the additional cost of producing one more unit.