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What is Predatory Pricing?
Predatory pricing is an anti-competitive pricing strategy where a firm sets prices deliberately low (often below cost) to drive competitors out of the market and later raise prices once competition is reduced.
Definition
Predatory pricing is the practice of pricing goods or services below cost with the intent to eliminate competitors and gain market dominance.
Key Takeaways
- Involves sustained below-cost pricing to weaken or remove competitors.
- Considered illegal or anti-competitive in many jurisdictions.
- Difficult to prove because low prices can also reflect efficiency or competition.
Understanding Predatory Pricing
Predatory pricing is rooted in competition economics and antitrust law. The strategy assumes that a firm has sufficient financial resources to absorb short-term losses while competitors cannot. Once rivals exit the market, the dominant firm can increase prices to recoup losses.
Regulators distinguish predatory pricing from healthy price competition. Temporary discounts, promotional pricing, or efficiency-driven low prices are not predatory unless there is clear intent and likelihood of recoupment.
Because intent and future market behavior are hard to prove, predatory pricing cases are complex and relatively rare in courts.
Real-World Example
In antitrust discussions, large retailers and digital platforms have been investigated for alleged predatory pricing practices when offering goods at prices smaller competitors could not sustainably match. Courts typically examine cost structures, market power, and long-term pricing behavior.
Importance in Business or Economics
Predatory pricing threatens market competition by discouraging entry and innovation. From an economic perspective, it can lead to monopolies or oligopolies, higher long-term prices, and reduced consumer welfare. As a result, competition authorities closely monitor pricing conduct in concentrated markets.
Types or Variations
Short-Run Predatory Pricing: Temporary below-cost pricing to test competitor resilience.
Long-Run Predatory Pricing: Sustained losses aimed at full market domination.
Strategic Predatory Pricing: Targeted pricing in specific regions or product lines.
Related Terms
- Antitrust Law
- Monopoly Power
- Price War
Sources and Further Reading
- Investopedia — Predatory Pricing
- OECD — Abuse of Dominance
- Federal Trade Commission (FTC) — Competition Guidance
Quick Reference
- Below-cost pricing with anti-competitive intent.
- Closely regulated by competition authorities.
- Difficult to prove legally.
Frequently Asked Questions (FAQs)
Is predatory pricing illegal everywhere?
No. Laws differ by jurisdiction, but it is heavily regulated in most developed economies.
How is predatory pricing proven?
By showing below-cost pricing, intent to eliminate competitors, and likelihood of recoupment.
How does predatory pricing differ from competitive pricing?
Competitive pricing reflects efficiency and consumer benefit, while predatory pricing aims to remove competition.
