What is predatory pricing?
Some businesses use this illegal tactic to be dominant in the market. This will eventually make them outshine other competitors by lowering their product or service prices below cost. The purpose is to drive competitors out of the market. They are doing this by cutting prices so low below costs that the users cannot live without them and the competitors are eliminated. Once the business remains the only one that seems relevant in terms of products and pricing, the price will increase drastically, and it will gain the profit that has been lost before.
One of the examples is Uber. Remember when Uber was the only e-hailing service that offered ride fares with huge discounts? They even made taxi drivers face losses. However, they didn’t stop there. Uber keeps on subsidizing consumers and drivers, making it very hard for other competitors to compete. That stage is called predation, the first stage of predatory pricing. This stage can only be done by big firms since they could sustain huge losses long enough to change the market price.
While some companies don’t engage in full predatory pricing, some even engage in partial predatory pricing. For example, a well-known and established smartphone manufacturer may have a large market share, which is then eroded by other competitors who are starting to gain popularity. To combat this, established businesses will selectively lower the price of mid-range smartphones while others remain unchanged. This is to make the mid-range smartphone more affordable than its competitors.
Why is it illegal?
If these businesses are experiencing losses for taking the risks, why is it illegal? This tactic is considered unethical or illegal due to the fact that it harms other competitors and leads to monopolistic behavior. The consumers are also affected by the pricing, which will then be increased to recover their losses from lowering prices by a lot. Since it eliminates all other competitors, remaining the only one to stand in the market means that there are no competitors, which makes it anti-competitive. This will also distort the way a normal market functions. When it prevents new businesses from entering the market, this leaves consumers with limited choices, leaving them with the only choice left.
Remaining the only choice in the market brings disadvantages. Not only will it limit choices, but innovation and quality will also be limited and discouraged. This is because it will be less likely for them to improve their product or service due to a lack of competitors. Not all pricing below cost is illegal or predatory. While it seems like it is easy to detect one, it is actually challenging. There are many factors that need to be considered, including business intentions and market conditions. These must be looked into before they are called predatory.
What are their motives?
While it is unethical, some businesses still want to use this risky strategy. Usually, these companies are already established. There are a few reasons that lead businesses down this path. Here are some of them:
- Established business may want to discourage or eliminate new businesses that are about to enter an industry
- To build a customer base in a shorter time
- To monopolize the market
- To gain market share rapidly
What are the effects?
Limited Consumer Choices
Usually, consumers get multiple choices before choosing a product or service that fits their personal preferences and budget. However, when businesses with predatory pricing are the only resources on the market, there are no other suitable competitors since they have already been eliminated. While it can simplify decision-making, it reduces the consumer’s freedom to match their preferences and needs with the offerings. This means they should only take what the business has to offer, even when it has low product quality and a higher price.
Hikes in Prices
The problem occurs if there is an increase in monopoly power due to predatory pricing. The existing consumers will be affected and harmed by the hiked price in the long term. They could increase the prices whenever it seemed appropriate. Without competitors, this will be easier since consumers will have no choice. However, when there is a price drop, it will benefit consumers and they will stay loyal to the product or service.
Predatory pricing is harmful but it is still considered rare. While there may not be much out there, it is important and worth watching out for. Seek out any price that is too low, and it might be a predatory pricer.
