Predatory pricing: Difference between revisions
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==Arguments for why predatory pricing would not occur in free markets== | ==Arguments for why predatory pricing would not occur in free markets== | ||
With few empirical examples of successful predatory pricing<ref name="Spulber_Failures" />, many economists still hold the view that predatory pricing leads to the possibility of market failure. However, there are a number of arguments as to why under a capitalist economy firms would not undertake a predatory pricing strategy successfully<ref name="Spulber_Failures" /><ref>Kelly, Kel. [http://mises.org/resources/4157/Why-American-History-is-Not-What-They-Say-An-Introduction-to-Revisionism "The Case for Legalizing Capitalism"], 2010, page 173-174.</ref>: | With few empirical examples of successful predatory pricing<ref name="Spulber_Failures" />, many economists still hold the view that predatory pricing leads to the possibility of [[market failure]]. However, there are a number of arguments as to why under a capitalist economy firms would not undertake a predatory pricing strategy successfully<ref name="Spulber_Failures" /><ref>Kelly, Kel. [http://mises.org/resources/4157/Why-American-History-is-Not-What-They-Say-An-Introduction-to-Revisionism "The Case for Legalizing Capitalism"], 2010, page 173-174.</ref>: | ||
# The recouping of losses, which is essential for a predatory pricing strategy, may not occur because rival firms could just exit the market when prices are lowered and re-enter when prices are increased. | # The recouping of losses, which is essential for a predatory pricing strategy, may not occur because rival firms could just exit the market when prices are lowered and re-enter when prices are increased. | ||
# Even if rival firms are forced out of the market when prices are increased by the predatory firm, this could induce new competitors into the market. | # Even if rival firms are forced out of the market when prices are increased by the predatory firm, this could induce new competitors into the market. | ||
Revision as of 19:04, 4 October 2011
Predatory pricing also known as price predation is an economic phenomenon whereby a company lowers its prices (possibly below costs) in an attempt to drive rivals out of the market.[1] The predatory firm is then expected to increase prices, after competitors have been forced out of the market, to a level that allows them to recoup any losses incurred during the predation period. In many countries this is viewed as an anti-competitive practice and can subject suspected predatory firms to prosecution under anti-trust laws.
Arguments for why predatory pricing would not occur in free markets
With few empirical examples of successful predatory pricing[1], many economists still hold the view that predatory pricing leads to the possibility of market failure. However, there are a number of arguments as to why under a capitalist economy firms would not undertake a predatory pricing strategy successfully[1][2]:
- The recouping of losses, which is essential for a predatory pricing strategy, may not occur because rival firms could just exit the market when prices are lowered and re-enter when prices are increased.
- Even if rival firms are forced out of the market when prices are increased by the predatory firm, this could induce new competitors into the market.
- The predatory firm must have a supply large enough to meet all demand at the lowered price. If its capacity is not great enough, prices will rise again.
- If the predatory firm were to repeatedly lower prices when rivals re-entered the market, the rival firms could short the dominant firms stock in an attempt to make up for losses resulting from the lower price.
References
- ↑ 1.0 1.1 1.2 Spulber, Daniel. "Famous Fables of Economic – Myths of Market Failures", 2002, page 20-21.
- ↑ Kelly, Kel. "The Case for Legalizing Capitalism", 2010, page 173-174.