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What is Predatory Pricing?

Mary McMahon
By
Updated May 16, 2024
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Predatory pricing is a practice in which a company attempts to gain control of a market by cutting its prices to levels well below those of competitors, so that those competitors go out of business because they cannot match those prices, or they cannot sustain lowered prices because they lack capital. This tactic is illegal in many regions of the world, although it can be very difficult to prove that a company is really engaging in predatory pricing. Some economists have suggested that this practice is largely theoretical, and that very few companies have actually engaged in it.

In order to use predatory pricing as a business tool, a company has to be strong enough to take a loss for an extended period of time on the products it is selling at low cost. Many companies lack the financial backing to do this, which can make this tactic a risky gamble. Companies must also rely on the assumption that competitors will not return to the market once prices are raised to more normal levels.

This practice works in a number of ways. Predatory pricing typically keeps new competitors out of the market, because they cannot hope to match the artificially low prices which have been created, and the practice also drives existing companies out of the market by lowering prices beyond a point that which they can match. In some cases, a company may drive other companies out of business and then acquire their facilities, employees, and/or equipment to prevent them from getting back into the industry.

One of the classic examples used to illustrate predatory pricing is that of a chain coffee shop which opens across the street from a locally-owned coffee shop. Theoretically, the prices at both shops should be similar, because the base expenses for coffee, pastries, and other products will be similar. However, the chain can rely on its corporate backing for support and make the decision to radically lower prices, attracting customers to its facility and eventually driving the competition out of business.

Critics of the predatory pricing theory argue that companies which appear to be engaging in this practice are really just competing openly and fairly in the market. In the example above, for instance, the chain coffee shop is not doing anything illegal, it's just making a calculated business decision to capture more of the market share, relying on the resources it has to support it through several months when income may be a little lower than desired.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By letshearit — On May 12, 2011

Does anyone feel that predatory pricing is part and partial to capitalism?

Isn't one of the traits of the free market to promote competition and see who can attract the most customers?

I believe that while this tactic may prevent smaller businesses from competing on a grand scale, it doesn't necessarily put them out of business.

Stores and services large enough to support this tactic usually don't have the same clientele and customer service associated with smaller businesses.

In the case of the coffee shop going out of business, as mentioned in the article, there is a very big difference for many, between something like Starbucks and a small locally run coffee hangout that features local music, unique snacks and great service.

By lonelygod — On May 12, 2011

Big box stores often use this predatory pricing tactic to run small businesses out of town. Not only can they offer goods much cheaper, but also usually in bulk, so the consumer feels like they are getting a better deal.

The problem rests in the quality of the goods being sold by these chains. Getting cheap brands is one thing, but if you want quality organic products, locally produced items, or let us say, clothing of higher quality, you must shop elsewhere.

I believe that predatory pricing is a tool of the corporate elite to force small businesses to fold in their wake. As a consumer it is best to buy locally, from small businesses and receive higher quality goods, all while keeping our money supporting our own local economy.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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