The Economics of Predatory Pricing Essay

The Economics of Predatory Pricing Essay

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The Economics of Predatory Pricing

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." N.p., n.d. Web. 15 Apr. 2014.
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.

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