Term of the Week: Predatory Pricing


What is Predatory Pricing?

The term refers to a pricing strategy in which goods or services are priced at an extremely low price with the purpose of driving away the competition and creating barriers to entry.

The Economics of Predatory Pricing

The economics of predatory pricing is fairly simple and straightforward. As an OECD report explains it, “The predator, already a dominant firm, sets its prices so low for a sufficient period of time that its competitors are forced to leave the market and potential entrants are deterred from entering. Assuming that the predator and its victims are equally efficient firms, this implies that the predator as well as its victims has incurred losses and that these losses are significant. For predation to be rational, there must be some expectation that these present losses (or foregone profits), like any investment, will be made up by future gains. This in turn implies that the firm has some reasonable expectation of gaining exploitable market power following the predatory episode, and that the profits of this later period will be sufficiently great to warrant incurring present losses or foregoing present profits. The theory also implies that some method exists for the predator to outlast its victim(s), whether through greater cash reserves, better financing or cross-subsidisation from other markets or other products.” 

Legality and Instances of Predatory Pricing

The practice has been restricted to a certain extent if not completely illegal in many countries including India, Australia, the United States of America, European Union, the United Kingdom, and Canada to name a few. The reasoning behind this is the belief that the practice is anti-competitive in nature and can harm both customers and the industry in the long run. 

Three of the instances when we have seen the big giants getting fined for allegedly engaging into the not-so-nice practice were:

  1. When the EU fined the mobile tech giant Qualcomm for selling its products at a price below cost to key customers with the intention of eliminating a competitor.
  2. The German government asked Walmart to increase its prices.
  3. Reliance Jio also allegedly engaged into the practice. 

References:

  1. https://en.wikipedia.org/wiki/Predatory_pricing 
  2. https://en.wikipedia.org/wiki/Barriers_to_entry
  3. http://www.oecd.org/competition/abuse/2375661.pdf
  4. https://edition.cnn.com/2019/07/18/tech/qualcomm-eu-fine/index.html
  5. https://www.nytimes.com/2000/09/09/business/09SHOP.html?ex=1137560400&en=56e96432d0a4872b&ei=5070
  6. https://www.epw.in/journal/2016/39/web-exclusives/reliance-jio-predatory-pricing-or-predatory-behaviour.html?0=ip_login_no_cache%3D8adaab05ebc0fabaf3f33011fbb70551 

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