What is Predatory Pricing?

Predatory pricing means to sell the product at a very low price to harm competitors (companies that are selling competitive products). Predatory pricing generally means one competitor lowering the prices of the product at the very beginning to attract customers. It must be the case that the competitor lowers the price below the cost of the good, thus taking a loss on sales. Competitors have to lower their prices to keep up - thus bearing losses equal to or greater than the predatory pricer. When the competition breaks (going bankruptcy or other cases), the predator company increases the price and sells its product at a higher rate. It creates a monopoly for the predatory pricer. It is important to note that the key element is the purpose of pushing competitors out of the market. 

How Does Predatory Pricing Work?

Predatory pricing is commonly known as undercutting. It is a tactic used by competitors in a price war. Predatory pricing is very difficult to prove. Much of the difficult concerns proving what is the cost of the good being sold to the seller. Depending on the supply chain and purchasing history, it is difficult to show that a seller is pricing a good below cost. Second, it is very difficult to demonstrate that a seller is pricing a good with the specific intent of thwarting competition and pushing competitors out of the market. Predatory pricing can be a scheme to deal with the new companies who enter the market with the same or substitute product. The predatory pricer enjoys the benefits of being a larger more established company. The smaller competitor lacks the resources to sustain losses and maintain in competition with the predator company. Of course, the cycle in predatory lending never ends. As the predatory pricer creates market dominance and raises prices, new competitors stand at the ready to enter the market and compete. As such, predatory pricing seeks to create a short-term competitive advantage for the predator company. The reason that predatory pricing may be illegal regards antitrust and consumer protection laws. If the monopoly power of a company increases, then it will be harmful to the public interest. Consumers will be forced to pay higher prices for available goods based upon the lack of competition. With that being said, predatory pricing is not always illegal. The FTC examines when predatory pricing violates the law. A company may be permitted to lower prices for a short duration or give discounts that result in losses. This is can be part of a valid competitive tactic if the purpose of the pricing is not to push competitors out of business. For example, a business may undertake this strategy to increase brand awareness, create loyal customers, or to increase exposure for other products or services that it sells. 

Related Topics

• Market Structure
• Perfect Competition
• Bidding War
• Complements & Substitutes
• Substitution Effect
• Imperfect Competition
• Market Power
• Price Takers
• Price Makers 
• Perfect Competition and Decision Making
• X-Efficiency
• Captive Market
• Contestable Market Theory
• Highest Profit Point in a Perfectly Competitive Market
• Marginal Revenue
• Using Marginal Revenue and Marginal Costs to Maximize Profit
• Marginal Revenue Curve
• Profit Margin and Average Total Cost
• Break Even Point - Cost Curve
• Shutdown Point - Cost Curve
• Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
• Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
• Long-Run Average Supply (LRAS)
• Decisions to Enter or Exit a Market in the Long Run
• Long-Run Equilibrium in a Perfectly Competitive Market
• Constant, Increasing, and Decreasing Cost Industries
• Productive and Allocative Efficiency in Perfectly Competitive Markets
• Market Efficiency
• Market Inefficiency
• Pareto Efficiency
• Market Failure 
• Search Theory
• Monopoly
• Natural Monopoly
• Legal Monopoly
• Bilateral Monopoly
• Promoting Innovation through Intellectual Property
• Predatory Pricing
• How Monopolists Set Price with the Demand Curve
• Total Cost and Total Revenue for a Monopolist
• Marginal Revenue and Marginal Cost for a Monopolist
• Inefficiency of Monopoly
• Perfectly Competitive Market
• Monopolistic Competition
• Duopoly
• Oligopoly
• Differentiated Products
• Perceived Demand for a Monopolistic Competitor
• Monopolistic Competitors Choose Price and Quantity
• Monopolistic Competitors and Entry
• Monopolistic Competition and Efficiency
• Cartel (Economics)
• Game Theory
• Traveler's Dilemma
• Prisoner's Dilemma
• Iterated Prisoner's Dilemma
• Nash Equilibrium
• Diner's Dilemma
• Trembling Hand Perfect Equilibrium
• Gambler's Fallacy
• Arrows Impossibility Theorem
• Backward Induction
• Tournament Theory
• Oligopoly and the Prisoner’s Dilemma
• Forcing Cooperation in a Prisoner’s Dilemma
• Cooperation and the Kinked Demand Curve
• Corporate Merger or Acquisition
• Antitrust Laws
• Herfindahl-Hirschman Index
• Concentration Ratio
• Other Approaches to Measuring Monopoly Power in an Industry
• Restrictive Practices under Antitrust Law
• Natural Monopoly
• Cost-Plus Regulation
• Price Cap Regulation
• Regulatory Capture