Question

What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it should be illegal?

Short answer

Short-term discomfort is exchanged for long-term gain for the predator. As a result, in order for the predator to succeed, it must be strong enough.

Step-by-step solution

Definition

Predatory pricing is a pricing strategy that involves setting a low price for a good or service in order to drive out competitors or create barriers to entry for possible new competitors.

Explanation

The predator should only expect this tactic to work if it is significantly stronger than its competitors and the obstacles to the entrance are high. New entrants are unable to replace those who have been pushed out due to barriers, allowing sustainable pricing to prevail long enough to compensate for the entire loss.

Predatory pricing is deemed anti-competitive in many countries and is unlawful under competition laws. It's frequently difficult to demonstrate that price reductions are the result of predatory pricing rather than fair price competition. In any scenario, newcomers may be kicked out of the market before the matter is heard.

As a result, the predator should only expect this strategy to work if it is significantly stronger than its competitors and has high entry barriers. New entrants are unable to replace those who have been pushed out due to barriers, allowing for long-term pricing to outweigh the entire loss.