Monday, November 23, 2015

Is predatory pricing profitable?

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price--without attracting more entry--when the entrant exits the industry.

Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990's.
Probably our best known airline predation investigation involved Northwest's response to Reno Air's entry into the Reno-Minneapolis city-pair in 1993. Not only did Northwest institute service of its own on this route that it had previously abandoned, it also opened a new mini-hub in Reno that overlaid much of Reno Air's own operation. Our investigation was well under way when the matter was resolved because, with the intervention of the Department of Transportation, Northwest decided to abandon its overlay of Reno Air's hub operation.

See here why these cases are so hard to win.

In other words, the government needs to prove that the low fares and extra flights would prove financially ruinous if continued indefinitely. To make the argument stick, the government will have to prove that American could reasonably expect to recover its losses after Vanguard or Sun Jet exits the market by raising fares -- confident that its high fares would not attract another round of upstarts.

8 comments:

  1. Contrary to thought that predatory pricing is rare, major retail chains practice this policy daily. When Wal-Mart enters a new market, prices are low, quality is high and service is beyond what local establishments are able to compete with. Once the local family store closes, prices rise, container sizes shrink (look at the size of your ice cream one-half gallon and laundry detergent bottle) and services diminish. The jobs and prices promised or advertised are cut to provide for the needed profits associated with the expansion, or to accommodate predatory pricing at another location. The difference between predatory pricing in the 1990's and the 21st Century, is that we have now come to accept the practice. Wal-Mart continues to compete with those companies that have beaten their everyday low prices. Wal-Mart provides both price matching and an on line service to review purchases against what other competitors are selling. The latter price match scheme provides a store credit that the customer can use at a later time.

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  2. Predatory pricing is alive and well in the US. Both Walmart and Amazon are examples of modern day behemoths that have the financial ability to drive other businesses out. Many small drugstores have been forced out of business as they are unable to compete with Walmart’s below cost pricing on competitive products. While some cases have been successfully won in court against Walmart, other cases are lost as Walmart quickly reverses its tactics but the damage was done to the small business.
    Amazon is another example of how a large multifaceted E-seller can afford to sell, if not give away books and music, forcing competitors to flee and close up. Amazon’s legal situation is a bit more difficult for the small business to fight as Amazon has complimentary products that mask the low prices. For instance Amazon is able to sell e-books below cost because it can also sell e-book readers and cover losses of the books. It’s questionable it this qualifies as predatory pricing or good strategy.

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  3. Predatory pricing is alive and well in the US. Both Walmart and Amazon are examples of modern day behemoths that have the financial ability to drive other businesses out. Many small drugstores have been forced out of business as they are unable to compete with Walmart’s below cost pricing on competitive products. While some cases have been successfully won in court against Walmart, other cases are lost as Walmart quickly reverses its tactics but the damage was done to the small business.
    Amazon is another example of how a large multifaceted E-seller can afford to sell, if not give away books and music, forcing competitors to flee and close up. Amazon’s legal situation is a bit more difficult for the small business to fight as Amazon has complimentary products that mask the low prices. For instance Amazon is able to sell e-books below cost because it can also sell e-book readers and cover losses of the books. It’s questionable it this qualifies as predatory pricing or good strategy.

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  4. This comment has been removed by the author.

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  5. https://ilsr.org/walmart-charged-predatory-pricing/
    http://www.telegraph.co.uk/finance/oilprices/9798120/Esso-and-Shell-face-allegations-of-predatory-pricing-over-fuel-cost.html
    I was unsure what predatory pricing was but when I looked it one, Wal-Mart was one of the companies that came up as an example. As Jim mentioned, Wal-Mart has been accused of this. I found an article that mentioned that in 2000, Wal-Mart had three charges of predatory prices; one is Wisconsin, Germany and Oklahoma. There was a fear that a price war would result in what Wal-Mart was doing with corner products such as milk and vegetable oil. Another example was Shell in France. They were selling their product with a cost that they will offer attractive supply arrangements to win business and they were not concerned with their pricing structure.

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  6. Claudia, I’m thinking the results of those charges were either dropped or found non-conclusive. The many sources I looked at mentioned Brook Group vs. Brown & Williamson Tabaco as the last case of predatory pricing that has been charged in the U.S.; and that was back in 1993 (Predatory). In this case, Brown & Williamson Tabaco Co. developed a generic cigarette that cost 30% less than brand names. They took over 4% of the market at the expense of major manufacturers. After a lengthy price war, it was reported Brown & Williamson took a loss on all of their sales during this time period (Brooke).

    Although I agree Walmart is a major contributor to predatory pricing, this is very difficult to prove; versus simple competitive pricing. Walmart is able to claim changes in economic need for the increase in prices and a change in consumer needs for the change in stock and container sizes. Recently, I read an article regarding one thing Walmart is noted for—changing their stock depending on the time of year, location, weather conditions, etc. For example, during winter storms Walmart locations located in the Northeast have greater number of Pop-tarts in stock. I think Walmart driving mom and pop shops out of business often times isn’t actually predatory pricing; but rather the simple convenience of competitive pricing in one location.

    Ref:
    Brooke Group LTD vs. Brown & Williamson Corp. Justia US Supreme Court. ND 18 February 2016. Web. https://supreme.justia.com/cases/federal/us/509/209/case.html.

    Predatory Pricing. Boundless.com. ND. 18 February 2016. Web. https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/pricing-legal-concerns-65/predatory-pricing-328-4070/.

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  7. I know one thing very well and that’s never ever to go with predictions, it is something that will never really work. I am trading only when I am certain of things and for me it is easier because of OctaFX broker since their epic cash back service, I am able to earn 15 dollars profits per lot size trade from there and that really makes me feel comfortable and relaxed with everything and I can be aggressive too with trading.

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  8. Predatory pricing occurs when a firm sells a good or service at a price below with the intention of forcing rival firms out of business. I believe economic wise, on the contrary, it has come to stay. Upon entry into an industry new firms endeavor to sustain competition with predatory pricing. It also helps break monopoly and drives prices down.
    However, in response to a new firm entering the market, the incumbent monopoly could counteract by cutting prices on certain products and use them as loss leaders. Although the practice is considered illegal (with the intention to sell goods at a loss with the purpose of forcing other firms out of business,) firms like Amazon and Walmart have become super forces to reckon with by extensively relying on the strategy. It is usually difficult to prove that prices dropped because of deliberate predatory pricing rather than legitimate price competition. In any case, competitors may be driven out of the market before the case is ever heard. Thus, many economists are doubtful that the concept of predatory pricing is actually practical and feasible in the long run sustainability of the economy.

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