Predatory pricing is an aggressive pricing strategy used by companies with the intention of driving competitors out of the market, or creating barriers to entry for potential new competitors. The strategy involves setting prices low enough to eliminate competition, with the intention of raising them later once the competition has been eliminated and market dominance has been established.
For instance, a large company might sell a product or service at a price significantly below its cost of production. Smaller competitors, who can’t afford to match these prices or sustain losses, might be forced to exit the market. After successfully driving competitors out, the company can then raise prices, sometimes to a level higher than they were before, taking advantage of its market dominance.
While predatory pricing can benefit consumers in the short term due to lower prices, it can be harmful in the long term as it reduces competition and can lead to higher prices and less innovation.
It’s worth noting that predatory pricing is illegal in many jurisdictions, including the United States and the European Union, because it violates competition laws. However, it can be challenging to prove predatory pricing because a company might argue that it’s simply offering lower prices to attract customers, which is generally a normal part of competition. To prove predatory pricing, one often needs to show that a company is selling products or services below cost and that it has a realistic plan to recoup its losses once competitors are eliminated.
Example of Predatory Pricing
Imagine there’s a large company called “MegaMart” that sells a wide variety of products, including books. A small, independent bookstore, “LocalBooks,” opens in the same town. LocalBooks cannot compete with MegaMart on variety, but they specialize in rare and local interest books and offer excellent customer service. However, MegaMart sees this new store as a threat.
In response, MegaMart begins to sell all its books at a significant discount, even below its own cost. Customers, attracted by the lower prices, start buying all their books at MegaMart, including those they might have bought at LocalBooks. Despite its specialized selection and customer service, LocalBooks sees a significant drop in sales because it can’t match MegaMart’s prices.
If this situation continues, LocalBooks might eventually have to close down due to lack of sales. Once LocalBooks is out of the picture, MegaMart no longer has any significant competition in the town for book sales. It then raises its book prices again, even higher than before.
In this example, MegaMart’s pricing strategy could be seen as predatory pricing because it lowered prices below cost with the aim of driving out competition, intending to raise them later once the competition was eliminated. However, proving this strategy in a legal context would require demonstrating that MegaMart intentionally sold below cost and planned to recoup its losses later, which can be difficult.
Please note that in real life situations, predatory pricing accusations are complicated and often require significant evidence, and legal opinions can vary. Therefore, this example simplifies the matter for the purpose of understanding the basic concept.