Predatory pricing

Definition

Predatory pricing is a strategy where a business sets its prices low, often below its costs, to eliminate competition and gain market share. This aggressive pricing tactic is aimed at driving competitors out of the market, after which the predatory company can raise prices to increase profits. It raises ethical concerns and can lead to regulatory scrutiny due to its potential to create monopolistic practices.

5 Must Know Facts For Your Next Test

1. Predatory pricing is often used by larger firms to undercut smaller competitors who cannot sustain long periods of low pricing.
2. This pricing strategy can lead to temporary losses for the company engaging in it, but the aim is to recoup these losses once competition is eliminated.
3. Regulatory bodies closely monitor predatory pricing practices, as they can lead to reduced competition and harm consumers in the long run.
4. Predatory pricing can also involve offering products at significantly discounted rates or even for free during an initial period to establish market presence.
5. Legal cases surrounding predatory pricing often focus on whether the pricing was intended to harm competitors rather than merely being part of normal competition.

Review Questions

• How does predatory pricing relate to competition in a market, and what are its potential impacts?
  • Predatory pricing directly impacts competition by allowing a larger firm to set prices so low that smaller competitors struggle to survive. This can lead to reduced market diversity and limit consumer choices if competitors are driven out. Once competition diminishes, the predatory firm may increase prices, harming consumers and leading to monopoly-like conditions in the market.
• Discuss how antitrust laws address predatory pricing and the challenges in proving such practices.
  • Antitrust laws are designed to prevent anti-competitive practices like predatory pricing by promoting fair competition. However, proving that a company engaged in predatory pricing can be challenging. Courts often require evidence that the company intended to harm competitors and had a realistic chance of recouping losses after driving them out of business, which makes enforcement difficult.
• Evaluate the ethical implications of using predatory pricing as a business strategy in today’s market.
  • Using predatory pricing raises significant ethical concerns as it prioritizes short-term gains over long-term market health. While it may benefit consumers initially through lower prices, the eventual loss of competition can lead to higher prices and fewer choices. This strategy often favors large corporations at the expense of smaller businesses and disrupts fair market practices, prompting discussions on responsible corporate behavior.

Related terms

Monopoly: A market structure where a single seller dominates the market, allowing them to control prices and limit competition.

Price War: A competitive situation where businesses repeatedly lower prices in an attempt to outdo each other, often leading to reduced profit margins.

Antitrust Laws: Legislation aimed at promoting competition and preventing monopolies by prohibiting anti-competitive practices like predatory pricing.