Predatory pricing consists of a pricing strategy that can be used by a firm that is predominant in the market in order to eliminate its competitors and thus secure a monopoly on the market. It is about reducing prices below cost.
Predatory prices have the effect of removing all competitors from the market, which, although they are as efficient as the firm that carries out the strategy, cannot withstand such low price competition. The predominant firm for its part, has as its final objective to keep the entire market and then increase prices and obtain monopoly profits.
Predatory pricing conditions
In order to affirm that a predatory pricing strategy is being applied in the market, three basic conditions must be met:
- A firm is able to lower its prices below its costs and maintain this situation until the equally efficient competitors that it is forced to leave the market.
- The pricing strategy will only be reasonable and beneficial to the firm that executes it if, once all competitors exit the market, the firm is able to raise its prices above the level of competition and keep them high for a long period of time. weather.
- Barriers to entrymust exist , otherwise once the firm raises prices new competitors will enter the market attracted by profits.
How to prove that there are predatory prices?
It is very difficult to prove that a firm is applying predatory pricing. Cost information is generally not available and it is possible to confuse a competitive strategy with a predation strategy.
Furthermore, even when price information exists, there is no consensus among economists on what type of cost measure should be used to verify the existence of predatory prices. In addition to the above, it is necessary to determine the size of the loss that the company that carries out the strategy could face and the real possibilities that it has to recover it in the future.