Predatory Pricing

What is 'Predatory Pricing'

Predatory pricing is the act of setting prices low in an attempt to eliminate the competition. Predatory pricing is illegal under anti-trust laws, as it makes markets more vulnerable to a monopoly. Companies may engage in a variety of activities that intend to drive out competitors, such as create barriers to entry for new competitors or unethical production methods to minimize costs.

BREAKING DOWN 'Predatory Pricing'

A sign of predatory pricing can occur when the price of a product gradually becomes lower, which can happen during a price war. This is difficult to prove because it can be seen as a price competition and not a deliberate act.

In the short term, a price war can be beneficial for consumers because of the lower prices. In the long term, however, it is not beneficial as the company that wins a price war, effectively putting its competitor out of business, will have a monopoly where it can set whatever price it wants. Such a tactic is only effective if the profits lost during the short-term deep price cuts can be recovered by increasing prices over a long period in the aftermath of eliminating rivals in the market.

The Federal Trade Commission says it carefully examines claims of predatory pricing, however there is a tendency among courts, including the United States Supreme Court, to remain skeptical of these claims. It is not necessarily illegal for a business to lower its 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. However, if the price reductions are part of a plan to drive out the competition, then it is a violation of the law. The number of rival businesses that operate in a given market plays a role in how effective or even likely predatory prices would be put into play. For instance, in an area with numerous gas stations, it would be challenging for any one of them to cut prices low enough and continue to operate long enough to drive out a significant portion ot their competitors.

Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position.