If you had a competitor that was selling a TV at $100, and you sold the same TV at $80 (while taking a loss) because you knew they couldn’t beat your price, you’re inacting in predatory pricing. This is illegal in many countries and is treated very harshly by many justice systems.
What is predatory pricing and when is it illegal?
Predatory pricing is the illegal act of setting prices low in an attempt to eliminate the competition. Predatory pricing violates antitrust law, as it makes markets more vulnerable to a monopoly.
What is meant by the term predatory pricing?
Definition of Predatory Pricing Predatory pricing occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business. Predatory pricing could be a method to deal with new firms who enter an industry.
What is predatory pricing in competition law?
Predatory pricing is a strategy that entails a temporary price below the cost of production in order to injure competition and thereby reap higher profits in the long run[i]. Predatory pricing is a strategy adopted to enhance market power.
What are the benefits of predatory pricing?
An essential advantage of predatory pricing is that, by communicating one’s willingness to use predatory pricing, possible new entrants to the market will be deterred from competing. Another advantage is that financially weaker competitors will be driven from the market, or into smaller niches within the market.
Why predatory pricing is bad?
Why does the issue matter? One main reason is that there are strictures against predatory pricing in U.S. antitrust law. The more rare predatory pricing is, the more likely it is that successful prosecutions of alleged predatory pricing are unwitting attacks on healthy price competition.
What are predatory tactics?
A variety of abusive non-market tactics, often referred to as predatory tactics, are typically used by monopolies in order to retain and expand their monopoly positions1 and by companies that are attempting to become monopolies.
How do you prove predatory pricing?
To prevail on a predatory-pricing claim, plaintiff must prove that (1) the prices were below an appropriate measure of defendant’s costs in the short term, and (2) defendant had a dangerous probability of recouping its investment in below-cost prices.
What companies use predatory pricing?
Examples of predatory pricing
- The WalMart/Target drug war. A prime example of predatory pricing tactics between two large franchises can be seen in the prescription drug price war between Walmart and Target in Minnesota.
- The Darlington Bus War.
What are some examples of predatory pricing?
One of the classic examples used to illustrate predatory pricing is that of a chain coffee shop which opens across the street from a locally-owned coffee shop. Theoretically, the prices at both shops should be similar, because the base expenses for coffee, pastries, and other products will be similar.
What is predatory pricing in economics?
How does predatory pricing affect markets?
Effects of Predatory Pricing. A price war spurred by predatory pricing can be favorable for consumers in the short run. The heightened competition may create a buyers’ market in which the consumer enjoys not only lower prices but increased leverage and wider choice.
Is predatory pricing rational?
In certain circumstances, predatory pricing can be a rational strategy for a firm with monopoly power facing a smaller competitor. Although theoretically a rational strategy, actual evidence on the frequency of predatory pricing, nonetheless, is limited.
