What is Predatory Pricing?

Predatory pricing, also known as eviction opponent pricing, refers to the strategy of reducing prices (even below cost) by companies in order to squeeze competitors out of the market and scare away potential competitors trying to enter the market. ^[1]

Predatory pricing

Predatory pricing is an unfair low price behavior, and companies that implement this behavior occupy a certain market

1. Its main body is the operator in the seller's position, and the operator has certain economic or technical strength. This feature makes it related to

Reputation model

The reputation model believes that predatory pricing behaviors of incumbent manufacturers on existing competitors will have an impact on their future potential competitors. Companies setting a low price today are trying to build a reputation of being a strong offensive incumbent to prevent companies from entering the same market or other companies from entering other markets. The idea of reputation model comes from

Sacrifice short-term profits

The economic theory of predatory pricing only says that companies choose pricing behaviors with less profit in the short term, but it does not clearly state that profits must be negative. in

Cost standard

Early tests of predatory pricing behavior were cost based (Areeda and Turner, 1975; Posner, 1976). They think below

Regardless of domestic or foreign laws and regulations, predatory pricing is a price monopoly, and the main body implementing predatory pricing is also a strong incumbent manufacturer in the industry, but many economists believe that predatory pricing Pricing strategies to drive out all competitors and achieve the goal of monopoly are very difficult, and their theoretical basis is insufficient.

1. Advantageous manufacturers use predatory pricing to give competitors or potential competitors a non-profit "signal" to induce them to actively withdraw or not enter. However, if the competitor knows that the predominant company is implementing predatory pricing, then the "signal" is false, and the competitor will not actively withdraw.

2. If predatory pricing is one of many competitors, it will at most make the relatively weak players in the market nervous. On the contrary, the losses caused by predatory pricing will hurt the manufacturers themselves, and let the stronger competitors (such as the second manufacturer) lead, and the rational manufacturers will not do so. Therefore, when there are enough competitors (such as more than four), there will be no predatory pricing with monopolistic intent.

3 If the incumbent manufacturer does not have obvious advantages compared with competitors and the cost gap is not large, once predatory pricing is adopted, it will suffer more losses than competitors, affecting the strength of the manufacturer, and giving competitors the opportunity to narrow the gap.

4 If the incumbent manufacturers use predatory pricing to drive out competitors, the competitors have huge exit obstacles, and the losses suffered by exits will be greater than the losses of continuing operations, and they will not exit easily. Moreover, if a competitor expects predatory pricing by incumbent manufacturers to be short-term, it may temporarily reduce production or use its assets to produce other products. In this way, it takes a long time for the dominant manufacturers to successfully drive away competitors, and the huge losses suffered by them are difficult to compensate.

5. After the implementation of predatory pricing, due to the sharp decline in price levels, market demand will increase significantly, and incumbent manufacturers must provide enough products to meet the increased demand. If incumbent manufacturers fail to meet this increasing demand, the rebound in prices will lead to the failure of predatory pricing strategies. If incumbent manufacturers increase investment and increase production to meet increased market demand, they will suffer even greater losses.

6. Even if the incumbent manufacturer successfully squeezes out competitors from the industry through predatory pricing, if the incumbent manufacturer resumes monopolizing high prices, it cannot prevent competitors from returning. Therefore, this monopoly is only temporary, and superior manufacturers cannot obtain high amounts Monopoly profit, predatory pricing is invalid.