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Concept
Predatory pricing
Summary
Predatory pricing is a commercial pricing strategy which involves the use of large scale undercutting to eliminate competition. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss. The aim is to force existing or potential competitors within the industry to abandon the market so that the dominant firm may establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.
The critical difference between predatory pricing and other market strategies is the potential for consumer harm in the long-term. Despite initial buyer's market created through firms' competing for consumer preference, as the price war favours the dominant firm, consumers will be forced to accept fewer options and higher prices for the same goods and services in the monopolistic market. If strategy is successful, predatory pricing can cause consumer harm and is, therefore, considered anti-competitive in many jurisdictions making the practice illegal under numerous competition laws.
Predatory pricing is split into a two-stage strategy.
The first stage of predatory pricing (predation) involves the dominant firm offering goods and services at below-cost rate which, in turn, leads to a reduction in the firm's immediate short-term profits. This drop in price forces the market price for those goods or services to readjust to this lower price, putting smaller firms and industry entrants at risk of exiting the industry. The principle behind this strategy is that, unlike new entrants and current players, the dominant firm has the size and capital to sustain short-term loss in profits, thus forcing a game of survival that the dominant firm is likely to win.
Official source
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