Predatory Pricing: Concept, Issue, Effect and Evolution

The article gives an insight into the Competition Law and also provides another basic concept known as Predatory Pricing. The article throws light on the evolution of this concept and not only its effects but also risks faced by such a scheme. Some examples have also been cited for a better understanding of the matter.

I. Concept: Predatory Pricing

When an enterprise settles its price so low that it removes all the competition in the market, such an act of lowering the prices is known as predatory pricing. Such an act is intended to create a monopoly in the market and thus violates the anti-trust law prevalent in the market.[1] It becomes difficult to prove the existence of predatory prices in the market as it is argued by the defendants that the lowering of prices falls under the ambit of normal competition and that such lowering is never intended to erode the existing competition in the market.

The company who is following the concept of predatory pricing to do away with the competitors in the market has to face the losses in the initial term but later on, it benefits because the demand of its products or services increases as first, the prices are low and second, there is no other competitor. This is why such a practice results in the formation of a monopoly in the market, allowing a single player to control all the forces of the market.

II. Working of Predatory Pricing

The company capable of affording the losses due to the predatory pricing in the initial phase gains an unfair advantage in the long term. Investors find this situation suitable to increase their share in the market since the prices are very low and then to increase the price to suck the profits out of the market. Thus, as long as this method allows the investors to gain the maximum profit, they agree to face the loss in the short run.

This strategy helps to oust all the existing enterprises looking for a way to enter the market and acts as a barrier to the entry of new businesses in the market. Due to the absence of any other player in the market, the ruling enterprise is free to charge any price, whether reasonable or unreasonable, to not only the consumers but also the retailers.

Predatory pricing can be brought under the ambit of anti-competitive pricing practice, which can be used in the short term. At a certain point, the enterprise that has created the monopoly in the market by virtue of practising predatory pricing starts hiking the prices of the goods or services, bringing them back to normal and thus, their position of price leader comes into jeopardy.[2]

III. Effects of Predatory Pricing

In the short term, the lowering of price may be beneficial to the consumers. The sudden change in the competition leads to the creation of a demand pool in the market as the consumers get to enjoy a wide range of choices, lower prices, along with increased leverage. But if this reduction in price forces other players to leave the market, the consumers have to face the consequences, which might be even worse. The creation of a monopoly in the market allows the only player to hike the prices of the commodity as much as they want and forbids the consumers to bargain in the choices available[3].

Creation of a monopoly in a sustainable market is not an easy thing for consumers also. It takes a lot of time, and a lot of challenge has to be faced with ousting some rival business from the market. For instance, one has to lower the prices for a substantial period of time to oust the competition, and for this period, the enterprise has to face loss.[4] This strategy will be successful if the loss faced by the enterprise due to the predatory pricing gets recovered as soon as all the rivals leave the market and especially before the entry of any other competitor leading to the prices returning to the normal value.

Another risk is associated with the practice of predatory pricing, which is also termed dumping. This is the phenomenon where the predator keeps on selling goods in a new foreign market in order to conquer it. Such a place in a foreign market is created by charging less for the price. The challenge faced by the players in the global market can be found in the prevention of dumped goods to be bought and used abroad and then getting them sold again in the lucrative domestic market.[5]

The factors due to which predatory pricing becomes beneficial to the consumers in the short term and provides a dual benefit to the predators in the long run, have resulted in a challenge for the prosecution to prosecute the predators under the anti-trust laws of various countries.

IV. Evolution of Predatory Pricing

There is nothing new in the concept of predatory pricing. The companies had started to follow the practice of predatory pricing even when the Aristotle had not come up with the ‘monopoly’ for the very first time in the world. Let us have a look at some cases regarding the same.

1. The Target/ Walmart drug war

One example of predatory pricing can be the price war of prescription drugs between two large franchises, namely, Target and Walmart, in Minnesota.

Walmart started to lower the prices of its prescription drugs even below the price floor in order to cut the competition from the market. The price floor is the price that is the lowest in value at which the commodities and goods can be sold and the profit can yet be received by the sellers. Such a price is fixed by the government.

Target had also decreased the prices of its prescription drugs instead of getting ousted from the market. Herein, the government of Minnesota state entered and had forbidden the sale of drugs at a price lower than the prices stated by the government and also limited the discount prescribed on the commodities. This is how the government proceeded to put a full stop to the price war.

2. The Darlington Bus War

There have been instances when the business started pricing their product at such a minimum cost that it seemed as if the product was available for free, for instance, in the matter of the Darlington Bus War. In the United Kingdom, when the bus was not under any regulation in 1986, a lot of private companies entered the market, which created competition so that their demand could be raised.

A company called Busways started a new scheme to give free rides to the passengers with a motive of ousting its rival DTC from the business. Such a scheme was directed to create a monopoly in the market. However, a commission was formed by the government to inquire into the matter, and it was brought to the forefront that the activities of the scheme of the Busways is not only against the interests of the public but also deplorable and predatory.

Due to this scheme, the DTC was put out of business, and Stagecoach, another company, acquired the Busways. And later, the chairman of Stagecoach, Brian Souter, revealed that the strategy of predatory pricing followed by the company had led to a negative impact in the area, due to which the financial gains that were made by monopolizing the market were outweighed.[6]

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[1] Will Kenton, Predatory Pricing, Investopedia; Available Here

[2] Patrick Campbell, What is Predatory Pricing: Examples, Definition, and when is it illegal?; Available Here

[3] Report by OECD, Available Here

[4] Aarti Krishnan, All you wanted to know about predatory pricing, The Hindu; Available

[5] Will Kenton, Predatory Pricing, Investopedia; Available Here

[6] Definition of Predatory Pricing, Available Here

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