Predatory pricing

Cutting prices is usually competition working as it should. But prices cut below cost to destroy a rival, then raised once the rival is gone, are something else: predation.

Predatory pricing is the practice of deliberately setting prices below cost to drive competitors out of a market, with the intention of raising prices once the competition has been eliminated. It is one of the more contentious concepts in competition policy, both because it can be a genuine abuse and because it is hard to tell apart from ordinary, beneficial price competition.

The logic of predation

The strategy has two phases. First, the predator prices below cost, accepting short-term losses, to undercut and bankrupt or drive out a rival, or to deter would-be entrants. Then, once competition is removed and the market is theirs, the predator raises prices above the competitive level to recoup the earlier losses and profit from the resulting market power. For predation to be rational, the eventual monopoly gains must outweigh the losses incurred during the price war, which requires that the predator can keep rivals and entrants out afterwards.

Why it is hard to identify

The difficulty for competition policy is distinguishing predatory pricing from the vigorous price competition that is the whole point of markets. Low prices normally benefit consumers and signal an efficient, aggressive competitor, exactly what competition is meant to produce. Predation looks similar in the moment, low prices, but is harmful in intent and effect. Proving that prices are below cost, and that the firm intends to recoup through later monopoly, is genuinely hard, which is why courts and regulators are cautious about condemning low prices as predatory and risk deterring the beneficial competition they resemble.

The sceptical view

Some economists are sceptical that predatory pricing is common or often rational, arguing that the strategy is expensive and uncertain, that the predator suffers the most in a price war it must lose money to wage, and that recouping requires barriers that, if they existed, would make predation unnecessary. Others point to cases where deep-pocketed incumbents have used below-cost pricing to see off weaker rivals or entrants, especially where they can sustain losses longer. The debate over how real and how dangerous predation is remains live.

Predatory pricing sits at a genuinely difficult boundary: between the low prices that competition policy exists to encourage and the below-cost pricing that exists to destroy competition. Telling the two apart, and intervening against the harmful kind without chilling the beneficial kind, is one of the subtlest and most contested tasks in the enforcement of competition law.