Definition of Predatory Pricing
Predatory pricing occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business.
Predatory pricing could be a method to deal with new firms who enter an industry. If a monopoly is enjoying supernormal profits, it will attract new firms into the industry.
However, in response to a new firm entering the market, the incumbent monopoly could cut price and make a temporary loss. The incumbent monopoly may have significant savings to finance a price war. However, faced with a low price, the new firm may be unable to make profit and so be forced to leave the market.
The monopoly firm regains its monopoly power, but also its action of predatory pricing discourages other firms from trying to enter.
Predatory Pricing and the Public Interest
If predatory pricing leads to an increase in monopoly power, then it will harm the public interest because it leads to higher prices in the long term. However, predatory pricing could be confused for a very competitive market. Consumers can benefit if prices fall and all the firms stay in business.
Predatory Pricing and Regulation
Predatory pricing in the UK is illegal. It is prohibited under EU Competition Law to sell goods at a loss with purpose of forcing other firms out of business.
Example of Predatory Pricing
In the Darlington bus wars, Stagecoach offered free bus travel to try and force the rival Darlington Bus company out of business.
Aberdeen Newspaper was fined by the OFT for predatory pricing and trying to eliminate its main competitor. Aberdeen Journals were fined £1.3million.
‘Aberdeen Journals deliberately incurred losses in a persistent campaign to remove its only direct rival from the market. This campaign continued despite the fact that the Competition Act 1998 prohibited predatory pricing from March 2000, and despite an OFT investigation already being in train. This was a serious infringement of the law, and the penalty should act as a deterrent to others.’ [OFT link]
Microsoft’s decision to offer its web browser (Internet Explorer) helped to make it very difficult for its main competitor (Netscape) who was also forced to offer its web browser for free.
Partial Predatory Pricing
Often firms engage in partial predatory pricing. This could be termed ‘loss leaders’ For example, supermarkets sell some items like bread and baked beans at a discount to attract customers. But, overall they remain profitable.