What is Predatory Pricing?
1192 reads · Last updated: December 5, 2024
Predatory pricing is the illegal business practice of setting prices for a product unrealistically low in order to eliminate the competition.Predatory pricing violates antitrust laws, as its goal is to create a monopoly. However, the practice can be difficult to prosecute. Defendants may argue that lowering prices is a normal business practice in a competitive market rather than a deliberate attempt to undermine the marketplace.Predatory pricing doesn’t always work, since the predator is losing revenue as well as the competition. The predator must raise prices eventually. At that point, new competitors will emerge.
Definition
Predatory pricing is an illegal business practice where a company sets its product prices extremely low to eliminate competitors.
Origin
The concept of predatory pricing originated with the establishment of antitrust laws, aimed at preventing companies from gaining monopoly power through unfair means. Historically, cases of predatory pricing have often appeared in highly competitive industries, particularly in the early 20th century in the United States.
Categories and Features
Predatory pricing is typically divided into two types: short-term and long-term predatory pricing. Short-term predatory pricing aims to quickly drive out competitors, while long-term predatory pricing involves maintaining low prices to control the market. Its features include pricing significantly below cost, intent to eliminate competitors, and eventually raising prices to gain monopoly profits.
Case Studies
A notable case is the 1990s accusation against American Airlines for using predatory pricing to drive out low-cost carriers. Although not ultimately convicted of predatory pricing, the case drew significant attention to competitive practices in the airline industry. Another example is Walmart's pricing strategy in certain regions, which, despite Walmart's denial of predatory pricing, is often criticized for driving out small retailers.
Common Issues
Investors often misunderstand the legality of predatory pricing, assuming all low-price strategies are predatory. In reality, only when a low-price strategy aims to eliminate competitors and eventually raise prices does it constitute predatory pricing. Additionally, implementing predatory pricing is challenging as it not only harms competitors but also results in revenue loss for the predator.
