Also referred to as “undercutting,” predatory pricing refers to a strategy undertaken by a company intended to drive competition out of business by offering its goods or services at a price far below the market rate. Even those who many be considering opening a new competing business in the area, if unable to meet and sustain equally low prices, often choose not to enter the market at all. This may result in a “de facto monopoly” in which the market is so dominated by one company or provider that others may as well not exist. To explore this concept, consider the following predatory pricing definition.
Definition of Predatory
- Relating to the practice of plundering, pillaging, or exploitation.
- The practice of injuring or exploiting others for personal gain or profit, including predatory pricing practices.
1580-90 Latin praedātōrius
What is Predatory Pricing
While most consumers may be of the opinion that prices can never be too low, the fact is that consumers may be ambushed if super-low pricing forces competitors out of the market, only to be followed by significant price increases. Competition in the marketplace not only gives consumers a choice of product and service quality, but keeps prices down. For example, the widespread use of cell phone and mobile technology has created a veritable stampede of providers offering lowered price plans and high-tech devices to woo consumers to their doorstep.
If one provider were to offer the best devices at the lowest prices, and offer consumers all-inclusive call/text/data plans for a rate far below the competition, it is likely that, in time, most consumers would migrate to that provider. Once the other providers were run out of business, or bought out by the first provider, they could raise rates at their whim, putting a serious dent in consumers’ wallets. Such occurrences have a seriously negative effect on the world economy as well. For this reason, predatory pricing practices are illegal in most countries.
Recognizing Predatory Strategies
A company’s decision to offer radically reduced prices is not necessarily a sign of predatory practices intended to injure competitors. Rather, it may simply be the beginning of a seriously competitive market. In fact, it is rare for large companies to use very low prices to drive others out of business with the intent of raising prices later. Such a strategy could only be successful if the company could minimize losses over the low-price period. This may require the use of unethical manufacturing or production practices in order to obtain products at prices far below the competition.
Such a plan would also require the company’s short-term losses to be made up for by charging much higher prices over a long period of time once the competitors have gone out of business or left the market. Although the Federal Trade Commission (“FTC”) takes claims of predatory pricing seriously, and examines them closely, such claims are rarely found to be valid. In fact, the FTC has yet to successfully prosecute any company for predatory pricing.
Why Predatory Pricing is Unlikely to Result in a Monopoly
Setting prices below a competitor’s prices, or even their costs, is not unusual, and doesn’t in itself violate any laws. Even the practice of setting prices below a company’s own costs is not illegal, unless it becomes a viable strategy to eliminate competition. Consider a family-owned gas station struggling because a name brand competitor down the street is offering a member discount on gasoline. It is likely that the lower-priced competitor is simply more efficient, as it purchases in greater quantity. It is only considered predatory pricing when the strategy creates a real danger of creating a monopoly on the market, so that the company can later raise prices to recoup its early losses.
This is generally only a consideration with very large companies providing goods or services to a large number of consumers, such as power companies, phone companies, and other utilities or necessary services. It is unlikely that a business with a large number of retailers, such as a gasoline retailer, super market, or other company, could hold out long enough to eliminate enough competition to create a monopoly.
Example of Predatory Pricing Concerns
A real-life example of predatory pricing and its potential effects was brought up in 2013, when it became evident to many that Amazon.com, super-provider of both printed and electronic books, was willing and able to offer books at prices well below those of their brick-and-mortar competitors. The argument is that Amazon has become such a powerful online retailer that it literally threatens the life of the publishing industry.
Amazon has shown that it has the ability to purchase a book for, say $16, then sell it for only $11, in many cases not even charging for shipping. Many feel that Amazon has the staying power to continue selling books at prices well below those of their competitors until it has sewn up the market. In fact, some experts have expressed a concern that Amazon may be able to drive prices down so low that it will be able to offer authors and publishers next to nothing for their works.
A potential danger here not recognized by most consumers is that, after such a company has secured 90 percent of the market, and it starts offering authors very low prices for their works, where else would they go to get their books published? Some people feel that such a scheme has the potential to change the face of providing and obtaining books and other reading materials forever.
Related Legal Terms and Issues
- Federal Trade Commission – An independent federal agency tasked with protecting consumers and ensuring a strong, competitive market by enforcing antitrust and consumer protection laws.