If predatory pricing – a price war – eventually results in competitors being kicked out and an increase in monopoly power, that is bad for the consumer. For this reason, predatory pricing practices are illegal in most countries. However, US law is on the side of the consumer, and price wars are good for shoppers. Star Athletica, L.L.C. (adsbygoogle = window.adsbygoogle || []).push({}); Why Predatory Pricing is Unlikely to Result in a Monopoly. “The material benefit [of below cost pricing] to consumers is marginal and temporary, but the restriction of competition by placing unfair obstacles before medium-sized retailers is clear and lasting,” said the Cartel Office. Examples of predatory pricing The definition thus excludes successful predatory pricing financed by current profits from other services, which was included under the previous two types of definitions. Theoretically, the prices at both shops should be similar, because the base expenses for coffee, pastries, and other products will be similar. 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. Predatory pricing is often aimed at achieving a monopoly. Predatory pricing is nothing new. Predatory pricing definition at Dictionary.com, a free online dictionary with pronunciation, synonyms and translation. 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. The plaintiff has to show to the court that the predator’s practices will not only affect competitors but also the market as a whole – that healthy competition is under threat. One of the classic examples used to illustrate predatory pricing is that of a chain coffee shop which opens across the street from a locally-owned coffee shop. (b) Pricing below cost for the relevant product in the relevant market by the dominant enterprise, (c) Intention to reduce competition or eliminate competitors, which is, traditionally known as the predatory intent test. It is likely that the lower-priced competitor is simply more efficient, as it purchases in greater quantity. Competition in the marketplace not only gives consumers a choice of product and service quality, but keeps prices down. Predatory pricing by dominant firms is prohibited by EU competition law as abuse of a dominant position. Can prices ever be "too low?" 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. The prevailing market conditions play a vital role in determining predatory pricing i.e. A university student who was studying retailing was fascinated by how the corner shop was able to continue selling that product so cheaply for so long. If a monopoly is enjoying mega-profits, it is bound to attract new players into the scene. Predatory Pricing. As a result, the Federal Law on Economic Competition was modified in 2006 to include a specific predatory pricing provision. 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. All Rights Reserved. Such price-cutting would be called ‘predatory’ (by some) because it is inconsistent with short-run profit maximization by the firm and it appears to benefit the firm in the long run only by bankrupting or otherwise weakening its rival. Although the Federal Trade Commission (“FTC”) takes claims of predatory pricing seriously, and examines them closely, such claims are rarely found to be valid. Predatory pricing can be of two types implicit which are possible via rebates and discounts or explicit. Such occurrences have a seriously negative effect on the world economy as well. The classical example of predatory prices are prices below average variable costs, following the second version of the Areeda-Turner test .”. To find out how the initial benefits of predatory pricing inevitably turn into drawbacks, we looked at some examples. If the predator’s competitors survive its predatory pricing strategy, the authorities in most countries will not intervene, because lower prices, more choice and a competitive market is good for consumers. They will only intervene if the competitors are killed off and the predator becomes a monopoly. What is predatory pricing? 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