What is predatory pricing

If I try to compete at those prices, I will go out of business. Isn't this illegal? A: Pricing below a competitor's costs occurs in many competitive markets and generally does not violate the antitrust laws. Sometimes the low-pricing firm is simply more efficient.

Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.

In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position.

Main Menu. Customers will suffer from abnormally high prices from the monopoly, as well as a drop in the quality of the product or service. Predatory pricing is nothing new. To find out how the initial benefits of predatory pricing inevitably turn into drawbacks, we looked at some examples. A prime example of predatory pricing tactics between two large franchises can be seen in the prescription drug price war between Walmart and Target in Minnesota.

Walmart, seeking to undercut the competition, initially began offering certain prescription drugs at well below its price floor.

Set by the government, a price floor is the lowest price that goods or commodities can be legally sold at based on the minimum cost at which turning a profit is still possible. Target, looking not to be undercut, matched these drug price cuts. However, Minnesota state law forbids the sale of drugs below their stated cost and limited the discount, thus putting an end to the price war.

Sometimes businesses are willing to price so low that they offer their product or service for free, as seen in the Darlington Bus War. Following the deregulation of buses in in the United Kingdom, a number of private companies began to compete over the demand for public transport. One company, Busways, began offering free rides to put its rival DTC out of business, with the intent of cultivating a monopoly in a given market.

Just like business ethics , aggressive marketplace competition can be a good thing—the pressure of competition stimulates innovation, incentivizes high-quality goods and services, and provides customers with a range of options to suit both their needs and budget. Of course, getting ahead of the competition is of paramount importance from a business perspective.

However, predatory pricing is one step too far. Practicing predatory price cutting can infringe on competition laws and competitive regulations put in place by the US supreme court. Be very careful when pricing your products. Use this guide to evaluate your pricing options and avoid a predatory pricing scheme. Tags: predatory pricing. Guide: How to optimize your pricing strategy with data. We break down the pricing pages of Zoom, Netflix, Slack, and more. What is predatory pricing: examples, definition, and when is it illegal?

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What Is Predatory Pricing? Key Takeaways In a predatory pricing scheme, prices are set low to attempt to drive out competitors and create a monopoly. Consumers may benefit from lower prices in the short term, but they suffer if the scheme succeeds in eliminating competition, as this would trigger a rise in prices and a decline in choice. Prosecutions for predatory pricing have been complicated by the short-term consumer benefits and the difficulty of proving the intent to create a market monopoly.

What Does Predatory Pricing Mean? Is Predatory Pricing Illegal? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

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