What Is Predatory Pricing?
Some people don’t like predatory pricing when companies set prices below what they cost to eliminate competitors. A market leader will usually use this type of unfair competition to get cheaper than competitors. When the competition is taken away or lessened, prices go up.
When companies use competitive pricing, they set prices based on how the market is doing and how much it costs. But, in the long run, predatory pricing is not a good business strategy. It’s not about matching or slightly undercutting rivals; it requires a significant financial risk to throw off the balance of the market.
Synonyms
- Loss leader pricing
- Price dumping
- Undercutting prices
How Pricing That Hurts People Works
This is predatory pricing when a business lowers prices to hurt its significantly smaller or weaker rivals. This strategy isn’t about giving customers value at a competitive price; it’s a planned move to eliminate competitors. The approach usually doesn’t work in the long run, and companies that use it are usually very wealthy and can handle short-term losses. The company wants to get competitors out of the market to raise prices without worrying about other companies cutting prices.
Examples of Predatory Pricing
Predatory pricing has been said to happen in many different businesses throughout history. Because they have high fixed prices and competitive markets, the airline and telecommunications industries have seen some of the most critical cases. Because these cases can change the market and consumers’ decisions so much, they often lead to legal challenges of predation and scrutiny by regulators.
Predatory Pricing Examples
For example, more prominent airlines have been accused of lowering fares on some routes to get smaller, cheaper airlines out of business. In the same way, big players in the telecommunications industry have been known to lower prices so much that smaller companies can’t compete. This hurts the market’s health and variety.
In the 1990s, American companies were accused of lowering prices on some routes to eliminate smaller companies competing with them. This case is an excellent example of this. American Airlines wasn’t found guilty of abusive pricing, but the case of Akzo Nobel NV v. Commission of the European Communities (1991) was a clear example. The European Court of Justice supported a decision that Akzo, a Dutch chemical giant, had set prices too low for ECS, a small British competitor.
Akzo set the prices of its organic peroxides lower than what it cost to make them on purpose so that ECS would have to leave the market. The court decided that Akzo wanted to eliminate ECS as a rival to strengthen its position as the market leader. This case was a big deal in European competition law because it showed how the EU feels about people acting aggressively in the market. This case showed that governing bodies are ready to step in when a company’s pricing strategies are meant to hurt competition and take over the market. This decision is a clear example of predatory pricing being caught and punished. It shows how competitive pricing tactics can go too far regarding the law and ethics.
What it means for markets and competition
Predatory pricing may seem good for customers in the short term because it lowers prices, but it can completely change how the market works in the long term. At first glance, this approach might look great for customers because it offers goods and services at much lower prices. But this early stage is often the start of a market with less competition.
Gained more market share
When a firm uses predatory pricing to eliminate rivals, especially smaller ones that aren’t strong financially, it often gains more market share. It could even become a monopoly or very close to it. It is usually okay for the predatory company to raise prices once the competition is gone or greatly diminished. This change can cause monopolistic pricing when one company sets prices higher than possible in an open market.
In the long run, predatory pricing leads to less creativity and lower quality. Since there aren’t as many competitors, the market leader doesn’t have to work as hard to come up with new goods or keep quality standards high. When there isn’t enough competition, the market can stay the same, which hurts the customers who initially gained from the low prices.
What this means for small businesses and new companies
Predatory pricing is a big problem for small businesses and newcomers to the market. These businesses often don’t have the large cash reserves they need to keep running when dominant rivals set prices too low to be profitable. Small businesses usually have smaller budgets and economies of scale than larger companies. This makes it hard for them to succeed in a market where prices are driven below cost.
The fear goes beyond just losing money right away. Fear of predatory pricing can keep small businesses and people who want to start their businesses from going into markets controlled by big companies with a history of using aggressive pricing strategies. This effect keeps new people from entering the market, which hurts innovation and diversity because new people often bring new ideas, services, or goods.
Different Types of Pricing Strategies vs. Predatory Pricing
Figuring out the differences between different pricing tactics is essential for telling the difference between competitive practices and ones that could be harmful.
In contrast, Discounting and penetrating prices
Because they are both bold, penetration pricing and discounting are often compared to predatory pricing. But they are not the same in meaningful ways.
Pricing for Penetration
Penetration pricing is a technique that new companies or products just coming out use often. The goal is to set a low price so that you can quickly get a lot of customers and get a piece of the market. In contrast to predatory pricing, this strategy is meant to build a brand and ensure long-term success, not eliminate rivals. When this approach is used, prices are usually raised once a solid customer base is built. However, the low prices initially aren’t meant to be unsustainable or hurt competitors.
Costing less
Discounting means briefly lowering prices to get more customers, get rid of extra stock, or adapt to short-term changes in the market. This is a common strategy that retailers and makers use for seasonal sales and managing the life cycle of a product. It’s not the goal of discounting to drive rivals out of the market, which is how predatory pricing works. In a market where competition is fair, it’s a normal thing to do.
Getting to Know the Fine Line
It’s hard to draw a clear line between predatory and robust pricing. Predatory pricing is described by what it’s meant to do, how long it lasts, and how it affects the competition.
The goal
If you use predatory pricing, you’re trying to eliminate your competitors, not just to get into the market or follow market trends. The aim is to make the market so that the predatory firm can set prices without any rivals getting in the way.
How long
This approach is usually used long enough to affect competitors’ businesses and drive them out of the market. Discounting and penetration pricing, on the other hand, are usually short-term or set ahead of time for a product’s lifecycle.
Effects on the Market
Predatory pricing tries to cut down on competition so that only one player is in the market. Conversely, penetration pricing and discounts are competitive strategies that don’t necessarily aim to make the market less competitive.
Although all three strategies use strong pricing, predatory pricing stands out because it is meant to hurt competitors, lasts longer, and has a more significant effect on the market.
Keeping Predatory Pricing in Check
When aggressive pricing is a threat, businesses must develop solid ways to fight back to stay in business and grow. Here are some of these plans:
Putting the Focus on Difference
Differentiating their goods or services is one of the best ways for businesses to protect themselves from predatory prices. Using this approach, you develop special features or qualities that make your product stand out. Price comparisons become less critical when a business offers something special and keeps customers who value these unique aspects. Differentiation can be based on design, quality, customer service, technology, or anything else the target group cares about.
Paying attention to niche markets
Another way to fight unfair pricing is to go after niche markets. Businesses can build a loyal customer base that is less likely to switch to a competitor’s lower price by focusing on specific groups of customers with specific wants or preferences. Niche markets will often pay more for specialized goods or services than low prices, and they will be willing to pay for features that make your business stand out.
Building and keeping strong ties with customers is essential to stop predatory pricing. Customers who care about their relationship with a company are loyal to that brand and will support it. Good customer service, loyalty schemes, consistent quality, and getting to know your customers personally can all help build loyalty.
Looking for Government Involvement
In situations where predatory pricing is transparent and harmful, getting help from government bodies is possible. In many countries, antitrust rules protect businesses and customers from unfair business practices like predatory pricing. Reporting these kinds of practices and asking for help can help individuals and make the market as a whole healthier.
What You Should Know About Predatory Pricing
In business, predatory pricing is a tricky and frequently controversial problem affecting markets, competition, and long-term planning. Here is a summary of these effects:
Changes in the Market
Predatory prices can change the way a market works. It might initially drop prices, but it could hurt competition over time. When there is less competition, prices can increase, and new ideas are less likely to come up. This hurts consumers, who initially gain from lower prices.
Thoughts on the Law and Ethics
Businesses that use unfair pricing strategies risk getting in trouble with the law and having their reputations hurt. Many places have antitrust rules that look closely at actions that hurt competition. Violators can face hefty fines and lose customers’ trust.
What it means for small businesses and competition
Predatory pricing is especially dangerous for small businesses because they often don’t have the money to compete with more prominent companies that price below cost. This impacts specific companies and reduces the variety of goods and services available to customers.
Businesses should think about their strategies.
Businesses need to be aware of the risks of predatory pricing and how to avoid them. Developing a long-term competitive plan that doesn’t just depend on price is essential. Some things to think about:
Being alert and adapting
Predatory pricing is something that businesses must always be on the lookout for in their markets. To stay in business and grow, you need to be able to adapt. Some ways to do this are focusing on niche markets, offering unique goods, or building strong customer relationships.
How to Use the Law
Businesses should know what the law says about their rights and choices. When you think someone is using unfair pricing, it may be best to talk to a lawyer and possibly the government’s regulatory officials.
Long-Term Goals
It is essential to think about long-term survival rather than short-term gains. This means putting money into new ideas, quality, and good customer service, which can give you an edge over your competitors that goes beyond price wars.
Many things are affected by predatory pricing, including the health of markets, the law, and business tactics. Companies need to be aware of these effects and think about how to respond strategically by focusing on how to set themselves apart, being aware of the law, and having a long-term view of market competition.
