What is PREDATORY PRICING?

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What does PREDATORY PRICING mean? PREDATORY PRICING meaning - PREDATORY PRICING definition - PREDATORY PRICING explanation. What is the meaning of PREDATORY PRICING? What is the definition of PREDATORY PRICING? What does PREDATORY PRICING stand for? What is PREDATORY PRICING meaning? What is PREDATORY PRICING definition?

Predatory pricing (also undercutting) is a pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly.

In many countries predatory pricing is considered anti-competitive and is illegal under competition laws. It is usually difficult to prove that prices dropped because of deliberate predatory pricing rather than legitimate price competition. In any case, competitors may be driven out of the market before the case is ever heard.

In the short term, predatory pricing through sharp discounting reduces profit margins, as would a price war, and will cause profits to fall. There are various tests to assess whether the pricing is predatory: Areeda-Turner suggests it is below Short Run Marginal Costs, the AKZO case suggests it is costing below Average Variable Costs, and the case of United Brands suggests it is simply when the difference in cost between the cost of manufacturing and the price charged to consumers is excessive. Yet businesses may engage in predatory pricing as a longer term strategy. Competitors who are not as financially stable or strong may suffer even greater loss of revenue or reduced profits. After the weaker competitors are driven out, the surviving business can raise prices above competitive levels (to supra competitive pricing). The predator hopes to generate revenues and profits in the future that will more than offset the losses it incurred during the predatory pricing period. This is known as recoupment, but two recent decisions by the courts, Tetra Pak II and Wanadoo stated that this is not necessary for a finding of predatory pricing.

This is a short-term strategy - the predator undergoes short-term pain for long-term gain. Therefore, for the predator to succeed, it must have sufficient strength (financial reserves, guaranteed backing or other sources of offsetting revenue) to endure the initial lean period. There must be substantial barriers to entry that prevent the re-appearance of competitors when the predator raises prices.

But the strategy may fail if competitors are stronger than expected, or are driven out but replaced by others. In either case, this forces the predator to prolong or abandon the price reductions. The strategy may thus fail if the predator cannot endure the short-term losses, either because of it requiring longer than expected or simply because it did not estimate the loss well.

So the predator should hope this strategy to succeed only when it is substantially stronger than its competitors and when barriers to entry are high. The barriers prevent new entrants to the market replacing others driven out, thereby allowing supra competitive pricing to prevail long enough to dwarf the initial loss.