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What Is Predatory Pricing?
Predatory pricing is an approach used to set prices as low as possible to eliminate the competition. While the method of competition might be perceived as reasonable, it all depends on the instruments used. The official take on predatory pricing suggests that it violates the existing monopoly and antitrust laws. In such a case, eliminating competition is a practice that can lead to the emergence of monopolies, which is opposite to the idea of a free market and free enterprise.
One of the key aspects of predatory pricing proponents argue in favor of the practice is the fact that lower prices for the sake of getting a competitive advantage are legal and viable approaches. Predatory pricing becomes unreasonable and illegal when the ones presenting it do so to undermine the very market rule indicating the importance of competition.
Businesses engaging in predatory pricing want to get rid of competition to allow the supplier to charge much higher prices later on. Often, proponents of predatory pricing set price tags at such a low margin that it results in losses. However, such losses appear for a particular period of time. However, while offering lower prices, it makes it impossible for other companies, which are often smaller market players, to follow the same strategy.
Finally, predatory pricing is also a method employed by companies that have just entered the market. To illustrate, suppose there is a large company that has been on the market for decades. It has supplies, customers, and revenues. In such a context, smaller new businesses want to enter the market. To prevent such a company from doing so, the large company reduces prices to create the condition in which nobody will buy the products of a new entrant. On the one hand, customers receive lower prices for a product. On the other hand, new entrants bring new products and innovations that make the number of products available to people much bigger.
How does Predatory Pricing Affect the market?
When it comes to predatory pricing having a particular effect on the market, it is crucial to focus on both short- and long-term impacts. Essentially, the broad of potentially adverse market conditions are so great that one needs to distinguish them based on the period of their action.
- Short-term market effects. One of the first effects of predatory pricing correlates to the fact that a company employing it will run into losses. Besides, companies who become victims of predatory pricing of others can have finances to help deal with the period of losses thus sustaining the game a predatory business started. In such a case, wanting to eliminate the competition can become a victim of their own approach. From the customer’s perspective, consumers will benefit from the aggressive pricing strategy of a predatory firm and its competitors. One can say that predatory pricing can lead to a positive short-term effect resulting in lower prices for products and services.
- Long-term market effects. However, in the long-term, there will be no winners in the predatory pricing environment. Competitors that won’t be able to sustain the competition will eventually lose, thus living a predatory company all alone with clients. If such a firm is not regulated, it can set any prices it wants. Driven by profits, it will exploit consumers and establish pricing points that won’t be beneficial to customers. In the monopolistic market, prices are extremely likely to rise very high. In addition, product quality will fall accordingly. The final adverse element is that a predatory environment leads to the stiffness of competition. A monopoly does not need to compete for quality, prices, or innovation, which leads to the lack of such.
These are short- and long-term effects of predatory pricing on the market. One can see that while the initial application of the strategy might be beneficial for customers. While companies engaging in predatory pricing sustain losses in the short run, consumers are the ones ripping the benefits of low prices. However, in the long run, if there is only one company left on the market, it would do with prices and quality everything it wants. And one can say that predatory firms will not consider the needs of customers in mind.
Predatory Pricing - how to beat it?
While creating monopolies is hard, it is still possible. Luckily, having a sustained market monopoly is not very simple. Eliminating competitors comes with considerable challenges, especially if there are firms ready to sustain losses. The thing is that setting lower prices to drive away competition is a strategy that can rebound. For instance, if a company sets low prices at a loss, it needs to be sure it can later get profits to cover the losses. If such a thing does not happen, the predatory pricing is in vain.
The aforementioned example is only one among the many. There are particular ways of beating predatory pricing at every stage. These are the actions to consider:
- Customer experience. Having the ability to grant a good customer experiences ensures that your clients won’t consider the price as the key factor in determining which product to buy. People value great customer service. And it can play a major role in the fight against predatory companies.
- Polished brand. If you have a polished brand, it means that your customers will be loyal. Loyalty suggests that people trust your decisions and understand that even if prices for your products is higher than competitors’ your products are still worth it, because of their quality and your reputation.
- Market research. Before entering the market, it is crucial to get information on competition to understand whether there are prerequisites for predatory pricing. Even if you see that there is monopolistic competition, you need to evaluate your resources and think whether you can sustain the competition. Understanding the market determines whether a business survives the competition.
- Differentiation and specialization. Having a broad portfolio consistitng of different products ensures thar customers won’t pay attention to only one particular product. Giving various options create more opportunities. More opportunities means that clients will not only look at prices you offer but also consider whether a company have interesting products.
These are among the strategies to battle predatory pricing from the perspective of businesses. However, the much more practical approach against monopolies and predatorycompanies lies in proper regulation and legal control. Essentially, it means that the government need to create conditions that make monopolies virtually impossible. Nonetheless, there are still businesses that try to stay on the verge, which means they want to drive out competition while avoiding having troubles with the law.
Predatory pricing is a method used to create monopolies by driving out the competition. Essentially, it is done by reducing prices to the point when they become unsustainable for rivals. The practice often comes at a loss that a company can later compensate by setting much higher prices, namely becaues there are no other sellers to challenge them. Predatory pricing is an illegal and wrong method that must be eliminated. Free enterprise system should welcome competetition, namely because it helps regulate the market properly and offer consumers high-quality products for reasonable prices.
Find answers to some of the most common questions people have regarding the use of Competera.
Is predatory pricing illegal?
Predatory or cost pricing is considered an illegal practice because it propagates monopolies and challenges the free market and competition. The Federal Trade Commission (FTC) examines accusations of predatory pricing and perceives it as illegal.
What are predatory pricing examples?
One of the examples of the approach is presented by Walmart and Target. Those two large franchises set extremely low prices for products to eliminate the competition. While being large companies, they can afford to sustain temporary losses to drive away competition.