What Is Predatory Pricing?

What Is Predatory Pricing?

Let me explain predatory pricing to you directly: it's the illegal business practice where a company sets prices for a product unrealistically low just to wipe out the competition.

This violates antitrust laws because the whole point is to build a monopoly. But prosecuting it can be tough.

Defendants often argue that dropping prices is just standard business in a competitive market, not some plot to wreck the marketplace.

Predatory pricing doesn't always succeed, since both the predator and the competitors lose money. Eventually, the predator has to hike prices back up, and that's when new rivals can jump in.

Understanding Predatory Pricing

To get how predatory pricing impacts markets and you as a consumer, you need to look at the long game.

You enjoy short-term perks from competitive pricing. More competition means a buyer's market with lower prices, more bargaining power, and broader options.

But if one company slashes prices way too low or even below cost, other competitors get forced out.

That's when your advantages disappear—or worse, flip against you. In a monopoly, the single producer can jack up prices, knowing you have no other choices.

Workers might suffer too, since the monopoly has no rivals for labor, which can mean lower wages.

The Effects of Predatory Pricing

To drive all rivals out, the predator cuts prices below manufacturing costs. Once competitors are gone, the company raises prices to normal or higher.

This hits you first, as you have no options but to pay more. But it also opens doors for new rivals to enter or old ones to return.

They can then offer prices that match or beat the original predator's.

In the end, you might get choices back. However, if the monopoly gets too entrenched, new companies can't break in, leaving a permanent monopoly.

The Challenges to Predatory Pricing

Fortunately for you, predatory pricing isn't easy to execute. Wiping out all rivals carries big risks.

Take a town with multiple gas stations: one could cut prices deep to draw business, but holding those prices long enough to kill the competition is hard.

Even if it works, success depends on quickly recovering lost revenue from the low prices.

As soon as the lone station raises prices, others will see the chance and move in.

Dumping As Predatory Pricing

Dumping is predatory pricing aimed at dominating foreign markets.

Companies doing this sell products abroad cheaper than at home.

With global markets, there's a new risk: dumped goods get bought overseas and shipped back home for resale at higher prices.

Dumping Gone Wrong

A classic example from the early 20th century involves a German cartel controlling Europe's bromine market, used in medicines and photography.

When American Dow Chemical exported cheap bromine to Europe, the Germans dumped bromine in the U.S. below cost.

Dow bought it cheap in the U.S. and resold it profitably in Europe, building their customer base at the cartel's expense.

Legal Risks of Predatory Pricing

Prosecuting predatory pricing is tricky, since you're proving low prices are bad or illegal.

The FTC examines claims carefully, but courts are skeptical.

The DOJ says it's a real issue and courts are too cautious.

The Supreme Court sets a high bar: plaintiffs must show effects on overall market competition and a strong chance of monopoly success, with prices actually below cost.

Important Note

It's not illegal for a business to price below costs for reasons other than targeting competitors.

Example of Predatory Pricing

The U.S. government fights predatory pricing by targeting exporters selling too cheap here.

The Commerce Department's International Trade Commission calls 'too cheap' less than fair value.

Any U.S. company can petition against foreign firms suspected of this.

Recent complaints include frozen shrimp and steel nails from India, lemon juice from Brazil and South Africa.

If found guilty, the Commission imposes duties to erase the dumping advantage.

What Does Predatory Pricing Mean?

Predatory pricing means a company lowers prices to drive rivals out. If it works, they raise prices to recover losses and survive. It's illegal because it creates a monopoly and kills choices.

Which Companies Have Been Accused of Predatory Pricing?

Walmart has faced accusations. In 1993, a judge ordered them to stop selling drugs and beauty products below cost after Arkansas stores claimed undercutting. Similar claims came from other states, and Walmart has been accused multiple times.

Is Predatory Pricing Illegal?

Yes, it violates antitrust laws in the U.S. and elsewhere for fair competition. But proving it requires showing intent to eliminate competition, not just compete.

The Bottom Line

Is that low price predatory or just a deal? From your view, it's hard to know.

If predatory, the low prices last only until rivals are gone. Then prices rise to cover losses.

With no competition, they can charge what they want. This hurts you and workers. It breaks antitrust laws, and if proven, the company faces serious consequences.