Definition of Predatory Pricing
Predatory pricing is an illicit market strategy where a business sets its prices at an unreasonably low level with the specific intention of driving competitors out of the market. Once competition is eliminated, the dominant player can then raise prices to recoup losses and secure significant profits. This practice aims to establish a monopoly or at least gain substantial market control.
Examples and Illustrations
Historical Case Studies
- Standard Oil Company: In the late 19th and early 20th centuries, Standard Oil employed predatory pricing tactics to eliminate independent oil producers and refiners, allowing the company to gain immense market control.
- Wal-Mart: There have been several allegations and court cases against Wal-Mart over its pricing strategies intended to edge out smaller retailers.
Why Businesses Engage in Predatory Pricing
Economic and Strategic Motivations
- Market Dominance: Acquiring a monopoly or oligopolistic position to dictate market terms.
- Barrier to Entry: Discouraging new entrants due to the fear of unsustainable competition.
- Economies of Scale: Leveraging large-scale operations to absorb short-term losses for long-term gain.
Legal and Regulatory Considerations
Antitrust Laws
Predatory pricing is prohibited under numerous national antitrust laws, such as the Sherman Antitrust Act in the United States. Regulatory agencies like the Federal Trade Commission (FTC) oversee and enforce these laws.
Applicability and Sectoral Insights
Different Industries Affected
- Retail: Large retailers may employ predatory pricing against local stores.
- Technology: Software companies might use it to eliminate emerging competitors.
- Transport: Airlines and shipping companies could reduce fares momentarily to expel smaller contestants.
Comparisons and Related Terms
Predatory Pricing vs. Competitive Pricing
- Predatory Pricing: Involves pricing below cost with an anti-competitive intent.
- Competitive Pricing: Entails setting prices based on market conditions without the aim of eliminating competitors.
Related Terms
- Price Discrimination: Charging different prices to different consumer groups.
- Dumping: Selling goods internationally at unfairly low prices.
- Oligopoly: A market dominated by a small number of large firms.
FAQs
Is predatory pricing always illegal?
Can small businesses engage in predatory pricing?
References
- Federal Trade Commission. “Predatory Pricing Strategies.” FTC.gov.
- Standard Oil Company Case, 1911. U.S. Supreme Court. “Standard Oil Co. of New Jersey v. United States.”
Summary
Predatory pricing is a detrimental business practice aiming to stifle competition and create monopolistic control by setting unsustainably low prices. Though short-term consumers might benefit from lower prices, the long-term impact includes reduced market choice and higher prices. Understanding and identifying predatory pricing is crucial for maintaining a healthy competitive marketplace.
This comprehensive overview provides a foundational insight into predatory pricing, elucidating its historical context, legal ramifications, and broader economic implications.
