Predatory pricing

Predatory pricing is a strategy where a company sets prices significantly below market levels to eliminate competition and gain market dominance.
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Updated: Jun 19, 2024

3 key takeaways

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  • Predatory pricing involves setting extremely low prices to drive competitors out of the market.
  • This strategy can lead to monopolistic control, allowing the predator to raise prices later.
  • It is considered anti-competitive and is illegal in many jurisdictions.

What is predatory pricing?

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Predatory pricing is a competitive strategy where a company deliberately lowers its prices to an unsustainable level to undercut competitors and push them out of the market.

Once the competition is weakened or eliminated, the company may then increase prices to recoup losses and maximize profits.

This practice is seen as anti-competitive and is often illegal, as it can lead to monopolistic control of the market.

How does predatory pricing work?

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In a predatory pricing scheme, a company sets its prices below the cost of production or significantly lower than competitors’ prices.

The objective is to attract customers away from competitors, causing those competitors to lose market share and eventually exit the market due to unsustainable losses.

Once the competitors are out, the predator can then increase prices, often to higher levels than before, to recover the initial losses and enjoy increased market power.

Indicators of predatory pricing

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  • Significant price cuts: Prices are set drastically lower than the usual market rate and production costs.
  • Sustained low pricing: The low prices are maintained for a prolonged period, not just short-term discounts.
  • Intent to eliminate competition: Evidence suggests the primary goal is to drive competitors out of the market.
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Predatory pricing is illegal in many countries because it undermines fair competition and can lead to monopolies.

Regulatory authorities, such as the Federal Trade Commission (FTC) in the United States and the European Commission in the European Union, monitor and investigate such practices. Companies found guilty of predatory pricing may face substantial fines, penalties, and corrective measures.

Challenges in proving predatory pricing

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  • Proving intent: Demonstrating that the company intended to eliminate competition can be difficult.
  • Cost analysis: Accurately assessing whether prices were set below cost requires detailed financial analysis.
  • Market dynamics: Differentiating between aggressive competitive pricing and predatory pricing can be complex.

Examples of predatory pricing

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Historical cases

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  • Standard Oil: In the late 19th and early 20th centuries, Standard Oil was accused of using predatory pricing to eliminate competitors and gain control of the oil market.
  • Wal-Mart: The retail giant has faced multiple lawsuits alleging predatory pricing practices aimed at driving out local competitors.

Modern context

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In the digital age, companies in the technology and e-commerce sectors have also been scrutinized for potential predatory pricing practices, especially in markets with high entry barriers and significant network effects.

Predatory pricing is a critical concept in understanding competitive strategies and market regulation.

Exploring related topics such as anti-competitive practices, monopoly power, and market regulation can provide deeper insights into the dynamics of market competition and the legal frameworks designed to ensure fair play.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.