How Predatory Pricing Becomes a Market Problem


March 4, 2021 | AtoZ MarketsA predatory market is a scheme where a business sets its prices very low to entice customers to eliminate their competitors as a goal. This is a subtle way to create a monopoly, so it is considered a violation of the anti-trust law.

Now, how do they evade this if it violates the anti-trust law? They say that it is part of their gravely discounted and low prices are their strategy for regular competition. They do not mean to insult or offend the marketplace’s law; this makes it hard for the prosecution to pursue them since it may be considered a valid excuse.

However, predatory pricing is usually a significant risk with lower success rates. Why? It is hard to regain the lost profit in a short period and let alone eliminate competition.

Monopoly

A monopoly is when an entity like a single company or an individual covers or owns almost the entire market like supplies, structures, or assets for a specific type of service or product. A monopoly is simply a company governing a sector or industry, giving them control over the market.

Effects on customers

Let’s say you are a customer in a market and multiple stores sell a product of your desire. You will go and check around to canvass the lowest price, right? When you discover a product with the same quality as the others but with a shockingly low price, of course, it will be the one to be placed in the cart.

This is the main scheme of predatory pricing. Their goal is to entice customers with a noticeably low price or a gravely discounted item to eliminate their competition. When they succeeded in this said elimination, customers will have to realize that their edge was only short since there will be limited choices. Here is when monopoly comes into the picture. Having only a limited selection, if not one for customers, this company can gain control over the whole market and have their prices raised anytime they wish to do so.

Enforcing the law

A predatory scheme is not an easy task to pull off, but it may have an enormous benefit for these types of predators if they manage to make it happen, leaving consumers of a particular market in a dark place.

This scheme is being monitored carefully by the Federal Trade Commission hand in hand with the Department of Justice. They created a paper, which was recently updated in 2015, stating that the courts should be alert and aware of these types of activities. A strategic analysis based on economic theory also informs that this is a real and existing problem.

The US Judiciary is skeptical of these issues. Still, the US Court says that should predatory pricing succeed; it might have an irreversible effect on the whole scape of the market due to monopoly. They also explained that a business’s prices must be extremely low and below their operational cost to produce their product before being accused of this scheme. Until then, it is not a violation to price items low as a typical strategy for competitions.

Source: https://www.investopedia.com/terms/p/predatory-pricing.asp

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