The Economics of Predatory Pricing
Introduction
Predatory pricing “is alleged to occur when a firm sets a price for its product that is below some measure of cost and forfeits revenues in the short run to put competitors out of business” (Sheffet p.163-164). The reason firms take the short term loss is because they hope to drive out competitors and raise prices to monopolistic levels. By doing this, they covered their short term loss to make even greater profits in the long term than they would have by not using predatory tactics (Sheffert). Predatory pricing became illegal under Section 2 of the Sherman Act. It has remained one of the more difficult allegations for prosecutors to prove, due to the complexity of determining the company’s actual intent and whether or not it the strategy is competitive pricing. According to Areeda and Turner, there are three ways to determine if a firm is implementing predatory pricing. First, a price above marginal cost is presumed lawful; second, a price below marginal cost is considered unlawful, except when there is strong demand; and third, average variable cost is considered a good proxy for marginal cost. This is a reason predatory pricing is still important today. The courts must decide whether or not companies are engaging in competitive prices for the good of the consumers or are using predatory tactics for the good of their own company. The purpose of this paper is to focus on the current legislation regarding predatory pricing, determining when there is predation in an industry and the cause and effect relationship it has on an industry.
The Current View and Legislation on Predatory Pricing
When people think of predatory pricing, two main laws come to the minds of most...
... middle of paper ...
...Pricing." Antitrust Law Journal 51.3 (1982): 361. Business Source Complete. Web. 15 Apr. 2014.
Helgeson, James G., and Eric G. Gorger. "The Price Weapon: Developments In U.S. Predatory Pricing Law." Journal Of Business-To-Business Marketing 10.2 (2003): 3. Business Source Complete. Web. 15 Apr. 2014.
Klevorick, Alvin K. "The Current State Of The Law And Economics Of Predatory Pricing." American Economic Review 83.2 (1993): 162. Business Source Complete. Web. 15 Apr. 2014.
"Predatory or Below-Cost Pricing." Www.ftc.gov. N.p., n.d. Web. 15 Apr. 2014.
single-firm-conduct/predatory-or-below-cost>.
Sheffet, Mary Jane. "The Supreme Court And Predatory Pricing." Journal Of Public Policy & Marketing 13.1 (1994): 163-167. Business Source Complete. Web. 15 Apr. 2014.
Tommy Takem owns a small appliance store in the southwest part of the state of Virginia. Tommy has built his business on targeting the poor, unsophisticated, and uneducated in the Appalachian regions of Virginia, Kentucky, Tennessee, and West Virginia. There is little competition in the region where he sells his goods; therefore, he charges 10-20% higher prices than the nearest retail competition. Furthermore, as a ruse to increase sales, Takem’s has hired a few high pressure salespeople to go door-to-door selling the appliances and electronics at a markup of 30% more than his retail location, though this information is not disclosed to the purchaser. Also, as most of Tommy’s clientele have poor credit, the financing is handled by Takem’s Appliances as well, with an additional charge of 15% plus the highest interest rate allowable by
“Processor Editorial Article - Antitrust Laws: Not Just For The Big Boys.” Editorial.Processor 19 Nov. 2004: 27+. Processor.com. Web. 29 Nov. 2011 .
Sweeney, B, O'Reilly, J & Coleman, A 2013, Law in Commerce, 5th edition, Lexis Nexis, Australia.
Apart from Antitrust laws, there are several other laws that promote fair business practices. The Robinson-Patman Act prohibits price discrimination. This act ...
Rubini, L. (2010). Microsoft on Trial: Legal and Economic Analysis of a Transatlantic Antitrust Case. Camberley, UK: Edward Elgar Publishing.
Have you ever wondered why do prices end with .99 or why it is that business are always making some kind of deal? Are these deals as beneficial as the customer thinks they are? What about the items priced higher than usually. Most people tend to think the higher the price the better quality right? Well, these are some of the topics this paper is going to help you better understand. Price points, Prestige Pricing, and Odd-evening pricing are all common price games used in the business world today. Price points are the different prices stores use to manipulate the consumers into buying what they want them to buy. I am sure everyone has wondered exactly what goes into the pricing of the items they purchase or what is it about these deals that keep luring me into the stores. Price gaming is a tricky business and businesses love how well it can manipulate the customer into believe and thinking a certain way. Showing you these three common price games will help you better understand and help you evaluate your purchasing decisions a little better.
As one commentator has explained, the Robinson-Patman Act “was designed to protect small businesses from larger, more efficient businesses. A necessary result is higher consumer prices.” Moreover, the Act ironically appears increasingly to be ineffective even in protecting small businesses. Over time, many businesses have found ways to comply with the Act by, for example, differentiating products, so they can sell somewhat different products to different purchasers at different prices. Such methods are likely to increase the seller’s costs—and thus increase costs to consumers—but do nothing to protect small businesses. The Act generally appears to have failed in achieving its main
Many businesses used this new process to raise the price of their competitors. They did this by putting constraints on entry restrictions (Woods 1986). At the state level, other laws were put in place to support the Food and Drug Act mainly to help local and area producers who were and would be facing new nat...
Antitrust laws are a collection of federal and state laws that regulate the business practices of large companies in order to promote and protect fair competition within an open-market economy. These laws prevent businesses from taking part in unfair business activities such as, but not limited to, price fixing, market allocation, and bid rigging. Price fixing is when two or more competitors agree to each charge the same price for a product and not undercut each other. Market allocation is when competitors agree to divide markets among themselves, you stay out of my territory and I’ll stay out of yours. Bid rigging is when several businesses within a market agree to take turns winning and losing bids in order to maintain market control and prevent competition. As you can imagine, these unlawful business
Investigating a foreign firm of alleged price dumping can be very complex, this is due to many factors to consider, such as, whether the products have the same characteristics or whether they are made in the same “like product” or equal value. This mean, if the Commerce Department does not have the identical product to compare it to, they will utilize another product that has closed resemble to the original product, which could result in a subjective conclusion. In the case of Pesquera Mares Australes Ltda. v. United States 266 F.3d 1372 (2001), demonstrates how Commerce Department could lead to a complicated matter in determining what the “like product” entails (Schaffer, Agusti, & Dhooge, 2015, p. 299-300).
Predatory pricing is the practice of selling products or services at quite low prices, in order to drive the competition out of the market, or to hinder the entry of the potential competitors. This involves pricing a product low enough in order to dampen demand. This pricing is generally used to end competitive threats. The company lowers the price with an aim of protecting market share from moving to the hands of the competitors. At times firms may reduce prices to sell off their outdated stock or to fill gap with their new line of products. Some vendors tend to set very low prices for new products while introducing them in the market with a view to inspire customers to try them out. However, this legal and ethical pricing strategy becomes illegal when a company uses unethical price cuts in order to squash the sales of its competitors by selling the same product at a lower price. Federal laws are made to protect the competitors from
To become successful in business it is essential to have a dog eat dog mentality as your competition may attempt to work the legal systems to gain a competitive advantage against you. That is exactly how Shell describes legislation, regulation, and litigation uses as an advantage for firms in his book titled Make the Rules or Your Rivals Will. The first example, network TV companies (Fox, CBS and ABC) vs. satellite TV companies (DirecTV, Dish Network, and PrimeTime 24), demonstrates how the customer plays a key part in the way legislation is shaped to benefit both parties. The second example, RCA vs. CBS, demonstrates how they used regulation to set the color TV standard in the 1950’s in an effort to force the markets to use their products. The third and last
Suttle, R. (2013). Definition of Pricing Strategy. Retrieved November 16, 2013, from Houston Chronicle: http://smallbusiness.chron.com/definition-pricing-strategy-4686.html
Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the business charges a customer the maximum price that they are willing to pay. This practice is becoming more and more important for customers because of the discrete ways that businesses are finding to make it easier to implement them in many different ways. These are categorized into three forms: first-degree price discrimination, second-degree price discrimination and third-degree price discrimination. First degree price discrimination is where consumers pay the exact price that they are prepared to pay, and where the producer charges different prices depending on how much the consumer is looking to pay.
Price discrimination is a corporate strategy where a seller offers the same product to customers at different prices. This practice is a technique where sellers appeal to a wide range of customers and capitalize on opportunities to maximize profits. The word discrimination often has a poor connotation. However, in terms of finances, the word discrimination merely denotes to how sellers can sway market price in order to meet the demand of buyers. In the United States, price discrimination generally is discussed and debated at the higher education level. In higher education, price discrimination denotes a scenario where academies charge unlike tuition prices to students for the same quality of education. This practice can be done at both the university and departmental levels as well. In order for price discrimination to occur, the seller must have the ability to adjust price. Price discrimination is also used by a seller that is offering a product that has a strong consumer demand with few alternatives. This is done because customers are willing to pay more for a given product. This entry provides examples of price discrimination in the private sector and in higher education.