Predatory pricing consists of a pricing strategy that can be used by a dominant firm in the market in order to eliminate its competitors and thus ensure the monopoly of the market. It's about reducing prices below cost.
Predatory pricing has the effect of driving all competitors out of the market. These, although they are just as efficient as the firm that carries out the strategy, cannot withstand such low price competition. The incumbent firm, for its part, has the ultimate goal of keeping the entire market. Generally, its purpose is to be able to increase prices thanks to the monopoly generated.
Predatory pricing conditions
In order to affirm that a predatory pricing strategy is being applied in the market, three basic conditions must be met:
- A firm is able to reduce its prices below its costs and maintain this situation until its equally efficient competitors are forced out of the market.
- The pricing strategy will only be reasonable and beneficial to the executing firm if, once all competitors exit the market, the firm is able to raise its prices above the competition level and keep them high for a long period of time. weather.
- There must be barriers to entry, otherwise, once the firm increases prices, new competitors will enter the market attracted by profits.
How to prove that there are predatory prices?
It is very difficult to prove that a firm is charging predatory prices. Cost information is generally not available and it is possible to confuse a competitive strategy with a predatory one.
Furthermore, even when price information exists, there is no consensus among economists about what kind of cost measure should be used to verify the existence of predatory prices. In addition to the above, it is necessary to determine the size of the loss that the company that carries out the strategy could face, as well as the real possibilities it has of recovering it in the future.