A deliberate strategy, usually by a dominant firm, of driving competitors out of the market by setting prices below production costs. If the predator succeeds in driving existing competitors out of the market and in deterring future entry of new firms, he can subsequently raise prices and earn higher profits. Predatory pricing by dominant firms is prohibited by EU competition law as abuse of a dominant position.
Prices set below average variable costs can be presumed to be predatory, because they have no other economic rationale than to eliminate competitors, since it would otherwise be more rational not to produce and sell a product that cannot be priced above average variable cost. European Commission. Once the predator has successfully driven out existing competitors and deterred entry of new firms, it can raise prices and earn higher profits.
The economic literature on the rationality and effectiveness of predatory pricing is in a state of flux. However, other economists have suggested that price predation might be feasible if it is undertaken to "soften" up rivals for future acquisition, or if potential targets of predation or their sources of capital have less information about costs and market demand than the predator.
Search: Search. Author Definition Definition The concept of predatory pricing comes into play when a dominant undertaking deliberately reduces its prices to a loss-making level for a short-term to discipline its existing competitors or foreclose the market to new entrants with a view to strengthening or maintaining its market power later on by way of the foreclosing effect of such predation.
Commentary In general, the starting point of the analysis is to assess whether the dominant undertaking incurred or is incurring avoidable losses for the relevant time period i. Bibliography Barry E. Definition Commentary Case references Bibliography. Turkey contributions visits. Following the deregulation of buses in in the United Kingdom, a number of private companies began to compete over the demand for public transport. One company, Busways, began offering free rides to put its rival DTC out of business, with the intent of cultivating a monopoly in a given market.
Just like business ethics , aggressive marketplace competition can be a good thing—the pressure of competition stimulates innovation, incentivizes high-quality goods and services, and provides customers with a range of options to suit both their needs and budget.
Of course, getting ahead of the competition is of paramount importance from a business perspective. However, predatory pricing is one step too far. Practicing predatory price cutting can infringe on competition laws and competitive regulations put in place by the US supreme court. Be very careful when pricing your products. Use this guide to evaluate your pricing options and avoid a predatory pricing scheme. Tags: predatory pricing.
Guide: How to optimize your pricing strategy with data. We break down the pricing pages of Zoom, Netflix, Slack, and more. What is predatory pricing: examples, definition, and when is it illegal? Patrick Campbell Follow patticus. What is predatory pricing? How predatory pricing works A company that can afford the initial losses caused by predatory pricing has an unfair market advantage in the long run. Is predatory pricing illegal in the U.
The classic alleged case of predatory pricing was that of Standard Oil of New Jersey. Back in the s, Aaron Director, a law professor at the University of Chicago and one of the founders of the discipline of law and economics, using basic economic reasoning, predicted that a look at the record would show that Standard Oil did no such thing.
He persuaded economist John S. McGee to examine the trial record. The result was the article quoted above, which has become famous. There was, indeed, no evidence in the trial record that Standard Oil engaged in predatory pricing. Why is predatory pricing so unlikely?
Imagine that Firm A makes high profits in market X and is the sole seller in that market. Firm A wants to knock out firm B in market Y. Firm A currently sells 5, units monthly in market Y and Firm B sells 1, units monthly. Why do I assume Firm A sells more than B? Because the usual predatory pricing story is that the firm with the larger market share uses predatory pricing to knock out the firm with the smaller share. Imagine that Firm B matches the price cut.
If the demand were perfectly inelastic, each would continue to sell the number of units it sold before. More realistically, though, at a lower price more would be demanded.
How will that quantity demanded be split between the two firms? There is no reason to think that Firm B, the prey, will simply increase output in response to the higher quantity demanded. Remember that the price is now lower and so when prices fall, firms typically respond by cutting output, not increasing it. So Firm B continues to sell 1, units and Firm A sells 6, units. Now both Firm A and Firm B will make losses. Notice something interesting, though. IBM, F. Average total cost is total fixed and total variable costs, divided by quantity of output.
See June 22 Hr'g Tr. Two decades after their conspiracy is alleged to have commenced, petitioners appear to be far from achieving this goal: the two largest shares of the retail market in television sets are held by RCA and respondent Zenith. The alleged conspiracy's failure to achieve its ends in the two decades of its asserted operation is strong evidence that the conspiracy does not in fact exist. But see Cargill , U. See U. Kenneth G.
See id. The Court strongly reiterated this conclusion in Weyerhaeuser , S. See June 22 Hr. Bolton et al. Crane, supra note 8, at 1; see also id. Additionally, regardless of their low probability of success, plaintiffs continue to file a significant number of federal predatory pricing cases, suggesting that predatory pricing complaints may afford plaintiffs strategic advantages whether or not they ultimately prevail.
Spirit Airlines, Inc. Airlines, Inc. Richard O. William J. See Kenneth G. Elzinga, Remarks 3 June 23, hearing submission "In my experience, if one plays with the math behind most alleged episodes of predatory pricing, it is difficult to come up with examples where recoupment is mathematically possible. See generally John R.
Lott, Jr. Bork, supra note 22, at ; see also Frank H. If monopolistic prices happen later, prosecute then. Easterbrook, Predatory Strategies and Counterstrategies , 48 U.
Theory , ; David M. Theory While this stylized market structure yields sufficient conditions to sustain the plausibility of predatory pricing, the plausibility does not transfer automatically to other generally more complex market structures. Before the authority of a strategic theory can be invoked in a particular dispute, it must be established that the information or financial resource condition in the market square[s] with the theory.
Posner, supra note 2, at ; see also Malcolm R. White eds. Northwest feature the exit of a viable competitor and a subsequent increase in prices. Strategy , "The evidence on price wars in the early liner shipping industry suggests they were predatory in nature.
Levin, Preying for Monopoly? Crane, supra note 8, at 39; see also id. Accord Posner, supra note 2, at ; Bolton et al. See Bolton et al. So, [Spirit] anticipates that, doesn't enter, and consumers continue to pay five hundred dollars. See Jonathan B. Brooke Group Ltd. Weyerhaeuser Co. Some commentators are particularly concerned about possible above-cost predation with products such as software or pharmaceuticals that have large fixed costs but very low marginal costs.
This is discussed further below at part C 3 c in connection with long-run average incremental cost. Barry Wright Corp. ITT Grinnell Corp. June 22 Hr'g Tr. Although one panelist disagreed that "prices above average variable cost should not be considered as predatory," id. Ordover ; see also id. Bolton adding, however, that focusing on cost may not be an effective way of distinguishing between procompetitive and anticompetitive effects.
What I don't understand. This commentator notes, however, that "for the sake of correctness in application, this Essay usually assumes that if an entrant prices twenty percent below an incumbent monopoly, the incumbent's prices will be frozen for twelve to eighteen months. The price freeze might also be adjusted for inflation in periods of high inflation or for substantial industry-specific price trends.
Crane, supra note 8, at 32 "In sum, the available information on lawyer fee structures in post- Brooke Group predatory pricing cases supports two hypotheses regarding the Chicago School predatory pricing precedents: First, that the potential for substantial plaintiff's verdicts in predatory pricing cases remains, and second, that some firms use predatory pricing complaints strategically to diminish price competition by competitors.
Available evidence, however, suggests that in recent years liability findings on claims involving predatory pricing have been rare. See supra Part I C 1. Matsushita Elec. Elhauge, supra note , at suggesting no need to protect from incumbent's above-cost price cuts an entrant who will eventually become more, or as, efficient as the incumbent since capital markets already successfully take that into account ; id.
Matsushita , U. The prospect of such litigation serves to deter legitimate, pro-competitive price cutting. Almost everyone at the time believed Toshiba was selling below cost.
And it took an instinct for economic reasoning or a recollection of a price theory course to realize that such a price was above the shut-down point, it was cash flow positive, and that Toshiba was better off making the sale to Sears than not making that sale. Kerr-McGee Corp. AMR , F. Newspapers, Inc. FMC Corp. Browning-Ferris Indus. Propane Gas Co. Langenderfer, Inc. Johnson Co. See AMR , F. See William J. Cascade Health Solutions v.
PeaceHealth, F. Kelco Disposal, Inc. Philips Corp. Windmere Corp. Temple Univ. Once it is sunk, there is no use worrying about it, and it should not affect any subsequent decisions. Costs, including fixed costs, that are not incurred if operations cease are called avoidable costs. See Competition Bureau, Can. But see Feb. I suggest that everyone reread footnote 13 of that case over and over and over again if you think that the extreme sacrifice test might make sense, as the Judge did.
See United States v. See also Stearns Airport Equip. June 22 Hr'g, supra note 4, at 9 Elzinga. The Department will, however, consider the foregone value of the possibility of renting or leasing an owned fixed asset in determining the cost the firm incurred in producing the putatively predatory increment. In that situation, there is a readily available means to ascertain the firm's cost of the asset used to produce the purportedly predatory increment.
This does not involve constructing hypothetical costs for the firm or imputing lost profits to it. See generally id. But I will show that for this purpose it is average variable cost or a near relative of [average variable cost], rather than marginal cost, that provides the requisite information. Wallace v. See Brooke Group Ltd. See Multistate Legal Studies, Inc. Advo, Inc.
See A. Poultry Farms, Inc. Rose Acre Farms, Inc. For an example of an approach to considering out-of-market effects in assessing the likelihood of recoupment, see Bolton et al. At the hearings, however, this panelist stated, "If meeting the competition is a best response, then this should be a defense.
Another panelist responded, "If it's the best response, then it would seem. See generally Bolton et al. The firm's expectation in engaging in promotional pricing is that "a favorable consumption experience induced by prices below cost will increase future consumer demand at prices above cost.
Efficiency is enhanced if this occurs, since the firm's profits stem from customers' future willingness to purchase its product and not the elimination of rivals.
This "reflects rational, profit-maximizing behavior," not predation. In contrast to new entrants or small rivals, the monopolist has little need to resort to extreme price reductions to acquaint existing consumers with the merits of its brand.
See May 8 Hr'g Tr.
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