What is Predatory Pricing
Predatory pricing is the illegal act of setting prices low in an attempt to eliminate the competition. Predatory pricing breaks anti-trust laws, as it makes markets more vulnerable to a monopoly. Companies that participate in predatory pricing might engage in a variety of activities intended to drive out competitors. This may include unethical production methods to minimize costs.
BREAKING DOWN Predatory Pricing
The gradual lowering of the price of a product can be a sign of predatory pricing. These actions could take place during a price war. Allegations of predatory pricing can be difficult to prove because it can be seen as a price competition and not a deliberate act.
Predatory pricing is only effective if the profits lost during the short-term, deep price cuts can be recovered by increasing prices over a long period afterwards.
Effects that Predatory Pricing Can Have on an Industry
In the short term, a price war with predatory pricing can be favorable for consumers because of the lower prices. This could create a buyers’ market where the consumer has more leverage and choice when shopping around. A price is not beneficial from a long term perspective if a company puts all of its competitor out of business and establishes a monopoly. The surviving company could then set whatever prices it wants.
The number of rival businesses that operate in a given market plays a role in how effective or likely predatory prices would be put to use. For instance, in an area with numerous gas stations, it would be a challenge for any one operator to cut prices low enough for a sustained period to drive out the competition.
The Federal Trade Commission says it carefully examines claims of predatory pricing. There is a tendency among courts to remain skeptical of these claims despite such investigations. It is not necessarily illegal for a business to reduce prices below a competitor’s costs for that same product or service. The business may have access to a supplier who can provide those goods at a deep discount. If the price reductions are part of a plan to drive out the competition, then it would constitute a violation of the law.
It is not a violation of the law if a business sets prices below its own costs either unless it is part of a specific strategy to eliminate competitors. It is also illegal when such as strategy has a dangerous probability of creating a monopoly for the discounting firm.