Predatory Pricing

1
Predatory Pricing

• Tension in the free-market model Gain market
  share by lowering prices (low margin/high
  volume) A/T laws protect competition not
  competitors
• So when does healthy competition (which
  includes survival of the fittest (i.e. most
  efficient)) become anticompetive? Cutthroat?
• Q.What would be objective of predatory pricer? A.
  To force loses on rival who would ultimately exit
  the market

2
More on Predatory Pricing

• Once rival(s) had left, Defendant would gain
  monopoly and could be a price-seeker
• Although price wars help consumers by driving
  down prices, at some price levels they can be
  very costly to the warriors
• If Defendant has sustained red ink to drive
  rival(s) out, it needs to recoup losses before
  reaping monopoly profits
• Has capacity to capture departed rivals share?

3
More on Predatory Pricing

• The recoupment period is critically dependent
  upon barriers to entry
• Supranormal profits will induce repositioning of
  assets (i.e. entry of new rivals)
• Thus red ink pricing is irrational except to
  attempt to monopolize (or to protect an existing
  legitimate monopoly)
• How recognize red ink? Pricing below marginal
  cost

4
Economics of Predatory Pricing (An Overview)

• Risk of Type II (false positive) Error
• Trebel damage implications
• Marginal cost cannot be readily (or reliably)
  measured
• Areeda-Turner surrogate av. Variable cost
• Robinson Patman Act and primary line price
  discrimination to stop geopraphic subsidation of
  predation (Lesson 28)

5
The Economics of Marginal Cost Surrogates

• If price below marginal cost, lose money on every
  unit sold
• Concepts of fixed cost, variable cost, total
  cost, average variable cost
• Even AVC can be tricky to determine if modular
  capacity or if predatory price shifts demand
  curve to right
• Fully distributed cost v. incremental cost
• Regulated/non-reg. markets cost allocation

6
Possible Shorter-Term Strategies

• Price disciplining as a signal to others under
  the umbrella
• Distress inventory liquidation sale solving
  cash-crisis could all lead to non-predatory,
  temporary below-marginal-cost pricing