Predatory Pricing

Definition

Predatory Pricing: Predatory pricing is a competitive pricing strategy where a firm sets the price of its products or services at an unprofitably low level with the intention of driving competitors out of the market. Once the competition is significantly weakened or eliminated, the firm plans to increase prices to recoup losses and gain higher profits.

Examples

Pharmaceutical Industry: A large pharmaceutical company drastically reduces the prices of a new generic drug to levels below production costs to undercut smaller generic drug manufacturers. After the smaller companies exit the market, the large company raises the prices.
Airlines: A major airline slashes ticket prices on certain routes to outcompete a low-cost airline. The major airline absorbs the initial losses with the expectation that the low-cost competitor will be forced out of business, allowing the major airline to raise prices again.

Frequently Asked Questions (FAQs)

Q1: Is predatory pricing legal?

Generally, predatory pricing is illegal under antitrust laws (such as the Sherman Antitrust Act in the United States), but proving it can be challenging. Authorities need to show intent to eliminate competition and that the pricing strategy is not sustainable in the long term.

Q2: How can consumers benefit or suffer from predatory pricing?

Consumers may initially benefit from lower prices. However, once the competition is eliminated and the predatory company raises prices, consumers could face higher prices and reduced choices.

Q3: What is the difference between competitive pricing and predatory pricing?

Competitive pricing involves setting prices competitively to attract customers and improve market share without the malicious intent of driving competitors out of the business, whereas predatory pricing aims for the elimination of competition through unsustainable low prices.

Q4: Can small companies use predatory pricing?

Typically, predatory pricing is a strategy employed by larger companies with sufficient resources to sustain prolonged periods of financial losses, unlike smaller companies which might be unable to sustain such losses.

Q5: What can governments do to prevent predatory pricing?

Governments can enforce antitrust laws, monitor market prices and behaviors, and take legal action against companies that are found to be engaging in predatory pricing.

Antitrust Acts: Laws designed to promote market competition and prevent monopolies, collusion, and unfair business practices, including predatory pricing.
Price Fixing: An agreement between competitors to maintain prices at a certain level, typically above market rates, to avoid competitive pricing wars.
Market Monopolization: The process by which a single company gains dominant control over a specific market, often through unfair practices including predatory pricing.

Online References

Suggested Books for Further Studies

“The Economics of Antitrust and Regulation” by Mark Armstrong and Robert H. Porter.
“Antitrust Law in Perspective: Cases, Concepts, and Problems in Competition Policy” by Andrew I. Gavil, William E. Kovacic, Jonathan B. Baker, and Joshua D. Wright.
“Law and Economics in a Nutshell” by Jeffrey L. Harrison.

Fundamentals of Predatory Pricing: Marketing and Business Law Basics Quiz

### What is the primary intent of predatory pricing? - [ ] Increase immediate profits - [ ] Gain market share quickly - [x] Drive competitors out of the market - [ ] Promote consumer loyalty > **Explanation:** The primary intent of predatory pricing is to drive competitors out of the market by setting prices at unsustainably low levels. ### Which laws typically address the issue of predatory pricing? - [ ] Environmental laws - [x] Antitrust laws - [ ] Labor laws - [ ] Property laws > **Explanation:** Antitrust laws address competitive practices like predatory pricing by preventing unfair market competition and monopolistic behaviors. ### After eliminating the competition, what does the predatory firm intend to do with prices? - [ ] Lower them further - [x] Raise them - [ ] Maintain them - [ ] Freeze them > **Explanation:** After competition is eliminated or weakened, the predatory firm intends to raise prices to recoup the initial losses incurred. ### Why is proving predatory pricing in court challenging? - [ ] Lack of laws against it - [ ] Uncooperative competitors - [x] Need to show both lower predatory pricing intent and unsustainability - [ ] It is not illegal > **Explanation:** Proving predatory pricing is challenging because it requires demonstrating both the intent behind the low prices and that these prices are not sustainable in the long term. ### Who benefits initially from predatory pricing? - [ ] Competitors - [x] Consumers - [ ] Shareholders - [ ] Regulators > **Explanation:** Consumers benefit initially from predatory pricing due to lower prices, although these benefits are typically short-term. ### What kind of companies are more likely to engage in predatory pricing? - [ ] Startup companies - [x] Large, resource-rich companies - [ ] Non-profits - [ ] Small local businesses > **Explanation:** Large companies with sufficient resources are more likely to engage in predatory pricing as they can withstand temporary losses. ### What often happens to the market once predatory pricing successfully eliminates competition? - [ ] Prices stay low - [x] Prices increase - [ ] New competitors immediately enter - [ ] Consumer choices expand > **Explanation:** Once predatory pricing eliminates competition, prices are often increased by the predatory firm to recoup losses and maximize profits. ### How does predatory pricing affect small businesses? - [ ] Helps them compete better - [x] Threatens their survival - [ ] Increases their market share - [ ] Facilitates mergers > **Explanation:** Predatory pricing typically threatens the survival of small businesses as they cannot sustain the exceedingly low prices. ### Which of the following strategies is not a form of predatory pricing? - [ ] Selling below cost - [x] Offering seasonal discounts - [ ] Providing extreme promotional prices - [ ] Selling with long-term unprofitability > **Explanation:** Offering seasonal discounts is a legitimate pricing strategy and not a form of predatory pricing which involves selling below cost with intent to drive out competition. ### When can consumers expect a price hike in a predatory pricing scenario? - [ ] When new products are launched - [ ] When a competitor matches the low price - [x] Once competitors are driven out of the market - [ ] When the market expands > **Explanation:** Consumers can expect a price hike once the predatory firm has successfully driven out the competitors, aiming to regain losses and achieve greater profits.

Thank you for exploring the complexities of predatory pricing through our comprehensive entry and engaging quiz questions. Keep advancing your knowledge in marketing and business law!