Predatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market, or create a barrier to entry into the market for potential new competitors. The other firms must lower their prices in order to compete with the predatory pricer, which causes them to lose money, eventually driving them bankrupt. The predatory pricer then has fewer competitors or even a monopoly, allowing them to raise their prices above what the market would otherwise bear. Street markets such as this one in Rue Mouffetard, Paris are still common in France. ... In economics and especially in the theory of competition, barriers to entry are obstacles in the path of a firm which wants to enter a given market. ... In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. ...

In many countries, including the United States, predatory pricing is considered an anti-competitive practice and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition. Anti-competitive practices are business practices that prevent and/or reduce competition in a market. ... It has been suggested that competition law be merged into this article or section. ...

Criticism of the theory of predatory pricing

Some economists claim that true predatory pricing is rare because it is an irrational practice, and laws designed to stem the practice only inhibit competition. This stance was taken by the US Supreme Court in the 1993 case Brooke Group v. Brown & Williamson Tobacco, and the FTC has not successfully prosecuted any company for predatory pricing since. Economics (from the Greek οίκος [oikos], house, and νομος [nomos], rule, hence household management) is a social science that studies the production, distribution, trade and consumption of goods and services. ... The Supreme Court of the United States is the supreme court in the United States. ... FTC may mean several things: The Federal Trade Commission. ...

Proponents of the theory that predatory pricing is irrational point to the fact that it must be a larger firm that engages in the practice, in order to be able to withstand the losses longer than its competitors. However, a larger firm will lose more money when it drops its prices below cost, because it has a larger market share with which to begin. Furthermore, it will not be able to recoup these losses because when it raises its prices to high levels, it provides a strong incentive for another firm to re-open the market and undercut it.

In addition, the competitors of a firm that engages in predatory pricing know that the predatory pricer cannot keep down their prices forever, and thus they must only play chicken in order to remain in the market. The game of chicken (also referred to as playing chicken) is a game in which two players engage in an activity that will result in serious harm unless one of them backs down. ...

Thomas Sowell explains why predatory pricing is unlikely to work: Thomas Sowell Thomas Sowell (born 30 June 1930) is a prominent American economist, political writer, and conservative-libertarian[1] commentator. ...

Obviously, predatory pricing pays off only if the surviving predator can then raise prices enough to recover the previous losses, making enough extra profit thereafter to justify the risks. These risks are not small.

However, even the demise of a competitor does not leave the survivor home free. Bankruptcy does not by itself destroy the fallen competitor's physical plant or the people whose skills made it a viable business.[1]

Critics of the predatory pricing theory support their case empirically by arguing that there has been no instance where such a practice has led to a monopoly. Conversely, they argue that there is much evidence that predatory pricing has failed miserably. For example, Herbert Dow not only found a cheaper way to produce bromine, but he defeated a predatory pricing attempt by a government-supported German cartel, Bromkonvention, who objected to his selling in Germany at a lower price. Bromkonvention retaliated by flooding the US market with below-cost bromine, at an even lower price than Dow's. But Dow simply instructed his agents to buy up at the very low price, then sell it back in Germany at a profit but still lower than Bromkonvention's price. In the end, the cartel could not keep up selling below cost, and had to give in. This is used as evidence that the free market is a better way to stop predatory pricing than government regulation such as anti-trust laws.[2] Herbert Henry Dow (1866 - 1930) was a U.S. (Canadian-born) chemical industrialist. ... General Name, Symbol, Number bromine, Br, 35 Chemical series halogens Group, Period, Block 17, 4, p Appearance gas/liquid: red-brown solid: metallic luster Atomic mass 79. ... A cartel is a group of producers whose goal it is to fix prices, to limit supply and to limit competition. ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... Media:Example. ...

Thomas Sowell argues:

It is a commentary on the development of antitrust law that the accused must defend himself, not against actual evidence of wrongdoing, but against a theory which predicts wrongdoing in the future. It is the civil equivalent of "preventive detention" in criminal cases — punishment without proof.[3]

Support for the theory of predatory pricing

Since the early 1980s, economic models based on game theory and the theory of imperfect information have suggested that predatory pricing can be rational and profitable under certain circumstances. For instance, by increasing production and lowering costs below price, a firm may convince its competitors that it has a lower cost of production than them, causing them to leave the market based on the conclusion that it would not be profitable for them to compete; this is known as low-cost signalling. Also, by pricing aggressively the incumbent firm will acquire a reputation for being "tough", this may deter potential entrants in the future. Another explanation for predatory pricing may be where long term success will require a large market share from early on (e.g. market for computer operating systems), usually markets with significant switching costs. By pricing aggressively to start with, even pricing below cost, firms can ensure a base of customers in the future from whom to make a profit. Game theory is a branch of applied mathematics that studies strategic situations where players choose different actions in an attempt to maximize their returns. ... Perfect information is a term used in economics and game theory to describe a state of complete knowledge about the actions of other players that is instantaneously updated as new information arises. ... Switching barriers or switching costs are terms used in microeconomics, strategic management, and marketing to describe any impediment to a customers changing of suppliers. ...

However, to date, no empirical example has yet been demonstrated of successful predatory pricing practice by a corporation.

External links

• Australian Competition and Consumer Commission page on predatory pricing: http://www.accc.gov.au/content/index.phtml/itemId/322986
• The Myth of Predatory Pricing: http://www.cato.org/pubs/pas/pa-169es.html
• Predatory Pricing, a New Theory: http://econserv2.bess.tcd.ie/SER/1999/essay02.html
• Patrick Bolton, Princeton University (see paper "Predatory Pricing: Strategic Theory and Legal Policy"): http://www.princeton.edu/~pbolton/
• Predatory Pricing and State Below-cost Sales Statutes in the United States: An Analysis: http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/vwGeneratedInterE/ct01491e.html
• Features: Herbert Dow and Predatory Pricing

Reference

• Luis M. B. Cabral: Introduction to Industrial Organisation, Massachusetts Institute of Technology Press, 2000, page 269.