What Is Predatory Pricing?
Predatory pricing is the illegal act of setting prices low to attempt to eliminate the competition.
Predatory pricing violates antitrust laws, as it makes markets more vulnerable to a monopoly. However, allegations of this practice can be difficult to prosecute because defendants may argue successfully that lowering prices is part of normal competition, rather than a deliberate attempt to undermine the marketplace. What’s more, predatory pricing doesn’t always succeed in its goal because of the difficulties in recouping lost revenue and successfully eliminating competitors.
- In a predatory pricing scheme, prices are set low to attempt to drive out competitors and create a monopoly.
- Consumers may benefit from lower prices in the short term, but they suffer if the scheme succeeds in eliminating competition, as this would trigger a rise in prices and a decline in choice.
- Prosecutions for predatory pricing have been complicated by the short-term consumer benefits and the difficulty of proving the intent to create a market monopoly.
Understanding Predatory Pricing
To comprehend how predatory pricing affects markets, it is necessary to go beyond the initial seeming benefit of low prices to see how these practices devolve over time and intersect with antitrust laws and the court system.
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 buyer’s market in which the consumer enjoys not only lower prices but also increased leverage and wider choice.
However, should the price battle succeed in slaying all, or even some, of the market competitors, then the advantages for consumers may quickly evaporate—or even reverse. A monopolistic marketplace might allow the company that holds the monopoly to raise prices, safe in the knowledge that the consumer now has no alternatives.
Predatory Pricing Hard to Pull Off
Fortunately for consumers, creating a sustained market monopoly is not simple. For one, eliminating all rival businesses in a given market often comes with considerable challenges. For instance, in an area with numerous gas stations, it’s usually daunting for any single operator to cut prices low enough, for long enough, to drive out all competitors.
Even if such an effort worked, the strategy would succeed only if the revenue lost through predatory pricing could be recouped quickly—before many other competitors might enter the market, drawn by a return to normal price levels.
Dumping as Predatory Pricing
There’s even risk in a predatory pricing practice known as dumping, which is when a predator attempts to conquer a new foreign market by selling goods there, at least temporarily, for less than they charge at home. The challenge, especially in an increasingly global market, lies in preventing the “dumped” goods from being bought abroad and resold in the lucrative home market.
A famous cautionary tale from the early 20th century involved dumping into the United States by a German cartel that controlled the European market for bromine, an essential ingredient in many medicines and a vital element to photography. After American company Dow Chemical exported competitively priced bromine to Europe, the Germans retaliated, selling bromine in the United States at below their manufacturing cost.
Dow responded by simply buying the bromine stateside at the dumped price and reselling it profitably in Europe, which allowed the company to strengthen its European customer base at the expense of the German cartel.
Predatory Pricing and the Law
The same factors that make predatory pricing beneficial to consumers, at least in the short run—and often of dubious benefit to the predators, at least in the long run—have tended to hamper prosecution of supposed predators under U.S. antitrust laws.
The Federal Trade Commission (FTC) says it examines allegations of predatory pricing “carefully” but that the courts have been “skeptical” of such claims. In turn, the U.S. Department of Justice (DOJ), in a paper updated as recently as 2015, has asserted that economic theory based on strategic analysis supports that predatory pricing is a real problem and that courts have adopted an overly cautious view of the practice.
Indeed, the U.S. judiciary often has been skeptical of claims of predatory pricing. Among the high bars set by the U.S. Supreme Court on antitrust claims is the requirement that plaintiffs show a likelihood that the pricing practices will affect not only rivals but also competition in the market as a whole, to establish that there is a substantial probability of success of the attempt to monopolize.
Further, the court established that for prices to be predatory, they must be not simply aggressively low but actually below the seller’s cost. That said, it is not a violation of the law if a business sets prices below its own costs for reasons other than having a specific strategy to eliminate competitors.
What Does Predatory Pricing Mean?
Predatory pricing is the lowering of prices by a company specifically to put rival firms out of business. By eliminating the competition, the company edges closer to becoming a monopoly, a privileged position of market dominance that could enable it to fix prices and circumvent the natural laws of supply and demand.
Which Companies Have Been Accused of Predatory Pricing?
Walmart is one company that’s been accused of predatory pricing. For example, in 1993, a judge ordered the retailer to stop selling drugs and health and beauty products below cost after three stores in Conway, Ark., accused the company of offering rock-bottom prices to drive them out of business.
This wasn’t an isolated case. Similar allegations were leveled at Walmart from rival companies operating in different states, and the company has been accused of predatory pricing on several other occasions since.
Is Predatory Pricing Illegal?
It should be, yes. Predatory pricing violates the antitrust laws set up in many different countries to protect consumers from predatory business practices and ensure fair competition. The issue is that predatory pricing is not always easy to prove. Companies can deny that they cut prices to eliminate the competition and instead argue that the measures were taken simply to be competitive.