Predatory Pricing content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.
Subtopics
Intro to Predatory Pricing
Examples & Evaluation of Predatory Pricing
3. Intro to Predatory Pricing
Definition: A short run strategy where a dominant firm sets its prices so low for a
sufficient period of time so that its competitors leave the market
Condition: P < AVC in SR (as per shutdown points)
In the short run the incumbent firm will make a loss, but so too will its rivals.
Rationale: If the incumbent can sustain losses for longer than its rivals, it can
increase price and hold greater market share after its rivals exit, hence greater SNP
Analysis:
We assume the dominant firm can outlast its rivals
due to larger cash reserves (from a dominant
position) or the ability to cross-subsidise losses (a
multi-product firm)
It is also implicit that a firm undertaking predatory
pricing expects the gain in future profits to
outweigh the short-term losses of the strategy.
In the diagram, pricing at pPP means that the
dominant firm makes a loss, and all other firms
would too, which is not sustainable into the LR
Quantity
C/R
AC
D = AR
cPP
avcPP
qPP
pPP
AVC
5. Examples & Evaluation of Predatory Pricing
Darlington Bus War: Busways, began offering free bus rides in the Darlington area
to put its rival, DTC, out of business, following deregulation of UK buses in 1986
This was done to force DTC out of business, with the intent of cultivating a monopoly.
However, when Busways was later acquired by Stage Coach, the company chairman admitted
that the negative impact of the predatory strategy had outweighed the financial gains made.
Predatory Pricing Evaluation 1: Predatory pricing is illegal in most countries, as it is
anticompetitive, making it less likely to happen.
Firms found predatory pricing face fines of up to 10% of worldwide turnover.
This increased cost cuts profits, and so the expected gains from such a strategy are lower,
meaning fewer firms would pursue this risky strategy.
Predatory Pricing Evaluation 2: Predatory pricing is unlikely to create a monopoly
in most cases.
If the next largest firm is still sufficiently large (e.g. Apple and Samsung), then it too could
sustain losses for a long period.
If the predatory firm knows it is unlikely to force out its main competitor, it would be
irrational to even attempt such a strategy.
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