Predatory Pricing: Definition & Examples

KEY TAKEAWAYS

• Predatory price cutting is the process of lowering costs to drive out competitors and create a monopoly. 
• While consumers may benefit in the short term, they will suffer if the process is successful. This is because it would trigger a rise in prices and eliminate choice.
• Prosecuting predatory pricing is complicated. This is because it is difficult to prove intent to create a market monopoly. 

What Is Predatory Pricing?

Predatory pricing is the act of setting the price of something to a lower level. This is with the intention of eliminating the competition. The process of predatory pricing breaches antitrust laws. This is because it makes markets more susceptible to a monopoly. 

However, accusations of this technique can be challenging to prove. This is because defendants may be successful in arguing that price reductions are a natural result of competition. This is rather than a calculated effort to weaken the market. Furthermore, recovering lost revenue and effectively removing competitors is incredibly challenging. Meaning predatory pricing doesn’t always achieve its purpose.

How Predatory Pricing Works

Fortunately for customers, establishing a long-lasting market monopoly is difficult. One of the many difficulties is the ability to fully eliminate all competitors from a market. For example, it is typically difficult for a single business to decrease rates to a low enough point. And lower them for an extended period of time to eliminate all rivals in an area. This is without considerable financial hardship and losses. 

Even if such a scheme was successful, the strategy would only work if the revenue lost through the lowered pricing could be quickly recouped. As well as before other competitors enter the market to take advantage of the lack of competition. 

How Predatory Pricing Affects the Market

Predatory pricing can affect the market in both long-term and short-term ways. 

The short-term effects are beneficial to customers but harm other companies. It does this by creating a buyer’s market, where consumers can normally afford to shop around and find the lowest price point. 

Once the competitors have been driven out, the predatory business can raise prices and recover their lost profits. This brings about the long-term effect of prices increasing as there is no alternative. 

Is Predatory Pricing Legal

No, predatory pricing is an illegal act. Antitrust laws have been established in numerous nations. This is to safeguard consumers from predatory business activities. As well as guarantee fair competition. And predatory pricing breaks these laws. 

The main problem is that it’s not always simple to prove predatory pricing. Companies may claim that the price reductions were made merely to remain competitive. And not to drive out the competition.

Examples of Predatory Pricing

One corporation that has been charged with predatory pricing is Walmart. For instance, a judge ordered the retailer to stop selling medicines, health items, and cosmetics below cost in 1993. This was after three retailers in Conway, Arkansas, claimed the business was offering ultra-low prices to force them out of business.

This incident wasn’t unique. Walmart was accused of predatory pricing on a number of occasions when competing businesses operating in several states made comparable claims against the corporation. 

Summary

Predatory pricing is an illegal activity that encourages the creation of monopolies. While it may benefit customers in the short term, having no competition allows businesses to control the market. This is bad for other companies, as well as bad for the consumer in the long run.