Predatory pricing is an illicit business tactic where a company sets prices for its products unreasonably low with the intent to outcompete and eventually eliminate rivals. This approach clashes with antitrust laws due to its potential to establish monopolies. However, prosecuting predatory pricing cases often proves challenging because defendants argue that lowering prices is a standard competitive strategy. The practice may fail since, like their competitors, the predator also incurs substantial revenue losses and ultimately needs to raise prices, inviting new competition.
Key Insights
- Predatory pricing entails setting prices unsustainably low to outmaneuver and remove competitors, potentially leading to a monopoly.
- While consumers may benefit momentarily from reduced prices, they could face disadvantages as monopolistic entities raise prices due to lack of competition.
- Despite the challenges, proving predatory pricing in court is tough.
Insights into Predatory Pricing
To comprehend the marketplace impacts, think long-term. Competing on price benefits consumers temporarily by creating a buyer’s market with lower costs and more options. Yet, when a single entity slashes prices unrealistically low, rivals may exit the market, eventually nullifying consumer benefits. Monopolistic control allows prices to rise unchecked, being the sole provider.
Consequences of Predatory Pricing
Thankfully for consumers, predatory pricing strategies often go awry. To eradicate competitors, the aggressor must undercut prices below their manufacturing costs, expecting to increase prices later to recover losses. This open window attracts new entrants as market prices normalize.
Challenges in Implementing Predatory Pricing
Implementing successful predatory pricing strategies is laden with risks. For instance, in a town with multiple gas stations, any station slashing prices may draw customers but sustaining that hurt rivals long enough is challenging. Moreover, raising prices to recover losses elicits quick response from new entrants or remaining competitors.
Exploring Dumping as Predatory Pricing
Dumping is predatory pricing on an international scale. Companies sell products cheaper abroad than at home, sometimes repurchased and sold back home at profitable prices. An early 20th-century example involved a German bromine cartel retaliating against Dow Chemical with dumped bromine in the U.S., which Dow then repurchased for profitable resale in Europe, undercutting the rival’s strategy.
Legal Framework around Predatory Pricing
Pursuing legal action against predatory pricing is complex. The Federal Trade Commission (FTC) acknowledges the difficulties in proving low prices as harmful or illegal. The U.S. Department of Justice (DOJ) highlights these challenges, with courts often requiring proof that predatory pricing might harm rivals and market competition altogether. Moreover, predatory pricing offense mandates demonstrating prices set below seller costs maliciously intended to eliminate competitors.
Real-World Example of Predatory Pricing
The U.S. government often targets exporters undercutting fair market values. For instance, complaints range from Indian steel nails to South Korean lemon juice. The International Trade Commission reacts by imposing duties to neutralize benefits gained from dumping.
Meaning and Implications of Predatory Pricing
Predatory pricing—lowering prices to drive out competition—is illegal due to its monopolistic outcomes and deterrence of market diversity. To counterbalance initial losses from reduced prices, predators subsequently hike prices. Walmart has faced multiple allegations, exemplifying enforcement issues and predatory tactics pursued against other businesses.
Legality of Predatory Pricing
Although dazzling deals might allure consumers, determining whether low prices are predatory or genuinely competitive deals remains convoluted. Predatory pricing, if successful, raises post-elimination prices due to lack of competition, but recognition and legal action remain intricate.
Final Thoughts
Distinguishing between predatory pricing and genuine bargains is crucial. As competition ebbs, the consequence for consumers can be steep price hikes. Vigilant assessment and regulation are essential to safeguard fair market practices.
Related Terms: monopoly, antitrust laws, dumping, competitive pricing, cartels.
References
- Foundation for Economic Education. “Herbert Dow and Predatory Pricing”.
- FindLaw. “Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.”
- U.S. Department of Justice. “Predatory Pricing: Strategic Theory and Legal Policy”.
- U.S. Department of Justice. “Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act: Chapter 4”.
- Federal Register. “International Trade (Anti-Dumping)”.
- Federal Register. “International Trade (Anti-Dumping)”.
- Los Angeles Times. “Wal-Mart Guilty of Predatory Price Cutting: Court: Retailer Ordered to Stop Selling Some Items Below Cost. Three Conway, Ark., Drugstores to Get $300,000 in Damages”.
- The New York Times. “Side Effects at the Pharmacy”.
