Predatory pricing

Definition

Predatory pricing is a strategy where a company sets prices extremely low, often below cost, to eliminate competition or deter new entrants from entering the market. This tactic aims to establish market dominance by driving competitors out of business, leading to increased market power for the predator once the competition has been weakened or eliminated. It raises significant concerns under antitrust law because it can lead to monopolistic practices and ultimately harm consumers in the long run.

5 Must Know Facts For Your Next Test

1. Predatory pricing is often difficult to prove in legal cases, as companies may argue that their low prices are due to legitimate competition or cost-cutting measures.
2. This pricing strategy can lead to short-term consumer benefits through lower prices, but it ultimately risks creating a monopoly that can raise prices and reduce choice once competitors are driven out.
3. Historically, cases like the U.S. v. American Airlines highlighted predatory pricing practices and how they can harm competition within an industry.
4. Predatory pricing is closely monitored by regulatory bodies, as it is considered a violation of antitrust laws if it successfully eliminates competition.
5. To be deemed predatory, the pricing must not only be low but also intended to harm competitors with the goal of recouping losses after achieving market dominance.

Review Questions

• How does predatory pricing relate to antitrust law and what implications does it have for competition?
  • Predatory pricing is directly linked to antitrust law because it represents an unfair competitive practice aimed at reducing or eliminating competition in a market. Under antitrust laws, such behavior can be challenged as it leads to monopolistic conditions that ultimately harm consumers through higher prices and reduced choices. Regulatory authorities scrutinize predatory pricing to ensure that companies cannot engage in this behavior without facing legal consequences, reinforcing the importance of maintaining fair competition in the marketplace.
• Evaluate the impact of predatory pricing on market power and how it affects consumers in both the short and long term.
  • In the short term, predatory pricing can benefit consumers by lowering prices, creating an illusion of healthy competition. However, once competitors are driven out of the market, the company employing this strategy can gain significant market power. This newfound dominance often leads to higher prices and fewer options for consumers in the long run, as the predator no longer faces competitive pressure to keep prices low or maintain quality. Thus, while initially appealing, predatory pricing ultimately undermines consumer welfare.
• Analyze a real-world example of predatory pricing and discuss its broader implications for industry competition and consumer welfare.
  • A well-known example of predatory pricing occurred with Amazon's entry into various markets where they heavily discounted products to outcompete smaller retailers. This strategy successfully drove many competitors out of business, leading to Amazon's dominance in several sectors. The broader implications include concerns about long-term consumer welfare; while initial low prices are advantageous, they raise fears about a monopoly's ability to set higher prices later without competitive checks. This scenario illustrates how predatory pricing can reshape entire industries and pose challenges for maintaining fair competition and protecting consumer interests.

Related terms

Antitrust Law: A body of laws designed to promote fair competition and prevent monopolistic practices in the marketplace.

Market Power: The ability of a firm to influence the price of a product or service in the market, often due to a lack of competition.

Monopoly: A market structure where a single seller controls the entire supply of a product or service, often resulting in higher prices and reduced choices for consumers.