Predatory pricing: It’s actual effectiveness
Predatory pricing is an anticompetitive strategy that indents to drive competitors out of the market and gain monopolistic profits. The predatory firm first lowers its price, to an extent which the revenue of the product does not cover the costs. Their competitors must then lower their prices below their average cost, thereby losing money as their products are sold. If they do not cut their prices, they will lose customers due to higher prices; if they do cut their prices, they will eventually go bankrupt. (DiLorenzo, 1992)
If the predatory firm manages to survive longer, which in most cases they will, they will eventually gain a monopolistic position. The modern antitrust law intends to prevent damage to consumer welfare and reduce the incentive of achieving excellence by outlawing anticompetitive behaviors. However, presently some people still believe that
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Koller, the author of “The Myth of Predatory Pricing,” after judging 23 cases that contains enough information, found out that actual predation was attempted in seven cases (30 percent) and succeeded in only four (17 percent). However other researchers did not come up with similar results. For example, Zerbe and Cooper examining the same cases beginning in 1940 and updated to 1982 concluded that predatory pricing was present in 27 out of 40 studied cases. (Bolton, P. and Joseph, B. and Riordan, M., 1999). These studies are only based on court cases and the settlements, which are more likely to be strong cases, have not been accounted in the study. So, the actual number of cases of a business conducting predatory pricing will be even more. Even Koller, who is against the legitimacy of predatory pricing, have to admit that 17% of predatory pricing actually worked. Considering the more recent study, more advanced techniques, like econometric measures, have been
The practice of price gouging after a natural disaster and the attempts to control it has a great impact on the market. According thefreedictionary.com, Price gouging is the act of charging more than market value for goods when no other source for the goods is available. However, the market value of needed goods after a natural disaster is not the same as it was before the disaster. The demand for needed goods will increase after a natural disaster, and as the demand increases the prices will also increase accordingly.
The principal microeconomic issue at work is supply and demand. The author invokes a number of economic theorists (both liberal and conservative) who endorse price gouging out of a belief that it is simply the natural manifestation of a capitalist society that relies on supply and demand. There is a belief that preventing price gouging allows consumers to act with little consequence for their actions. According to this line of thinking, a business is well within its rights to raise prices because they should respond to public demand; at other times, there is little demand, so they are wise to take advantage when there is significant demand. Moreover, economic theorists have argued that price-gouging is positive because it makes people question whether the item they are considering purchasing
Monopolies and oligopolies often use anti-competitive practices, which can have a negative impact on the economy. This is why company mergers are often examined closely by government regulators to avoid reducing competition in an industry.
The antitrust laws are the basis of this national policy. These laws, enforced by both the federal and state governments, require companies to compete in the marketplace. The Sherman Act, the first federal "antitrust law," was enacted in 1890, at a time when there was enormous concern about "trusts" -- combinations of companies that were able to control entire industries. Since then, other laws have been enacted to supplement the Sherman Act, including the Federal Trade Commission Act and the Clayton Act (1914). With some revisions, these laws still are in effect today. They have the same basic objective: making sure there are strong economic incentives for businesses to operate efficiently, keep prices down, and keep quality up.
Antitrust laws are meant to protect competition in markets. They try to ensure that all individuals have an “equally opportunity in honest competition.” Early in the nation’s history, there was widespread fear of the dangers of monopolies and other restrictions on competition. In 1890, Congress passed the Sherman Antitrust Act to prevent limits on competition caused by private parties. Thus the main goal of antitrust law is to preserve “economic freedom” and a “free-enterprise system.” Specifically, it attempts to preserve “the freedom to compete” for businesses. In a practical sense, antitrust laws are seeking to prevent burdens on competition in the marketplace.
Laws and Regulations are not easily defined when antitrust laws are violates. There are many versions and analysis which often leads to agree to disagree. With public support, antitrust laws can be enforced and effective but with ignorance and indifference, it can become weak.
The predominant view in the United States is that The Sherman Antitrust Act of 1890 was passed with the intent to protect consumers from inefficient market forms, and predation by large corporations. The specific provisions of the Sherman Act, as well as the later Clayton Act of 1914, prohibit acts that are considered to be anti competitive such as cartels, monopolies, price discrimination, and predatory pricing. Mergers and acquisitions are also individually reviewed to ensure they won 't have an anti competitive effect on the market. We will look at each of these acts to try to determine their actual impact to the consumer. We will also
In all three degrees of price discrimination firms are able to make more profit and eliminate any excess capacity they may have. Firms are able to do this by charging higher prices to those consumers with a more price inelastic demand for their product. The firm is reducing the welfare of these consumers by changing them at the maximum price they are willing to
(2013). Why Economists Love Price Gouging, And Why It's So Rare. Retrieved 19 November 2015, from
The purpose of antitrust laws is to both promote and protect competition. They aren’t designed to go after big companies simply because they are bigger or more successful than others in their industry. They aren’t anti-market or anti-business. They are intended to be just the opposite, in fact. They are meant to promote successful market economics through the assurance of healthy competition while keeping abuses of the system in check that could overrun the market.
While the primary goal behind antitrust is to protect customers—and this effort is in that interest, a portion of that protection should also include the protection of industry innovation and access by consumers to competing voices.
The second pricing strategy is the penetration pricing where the product enters newly into the market. To gain some consumer base from the competitors, the seller initially charges a lower price than the competitors. For example the ticket prices initially charged for IPL, Indian Premier League, matches were lower than the ticket price of the competition ICL matches. On the contrary, price skimming strategy is to grab the financially top class of the market and to do this, the seller charges high prices. The effectiveness of this strategy is based upon
Predatory pricing is a tool that is used to achieve market power. It is the practice of pricing below cost. This can foster market power in three simple ways, by eliminating rivals, by disciplining rivals who refuse to cooperate in keeping prices at monopoly levels, or by depressing the market value of rivals' assets so that a predator can purchase these assets at below market prices. Predatory pricing does not allow the market to work freely. It is a way of controlling the market.
The bargaining power of buyers: Buyers have more control over an industry than one might think. They want lower prices, higher quality, and more services and this makes the competitors play against each other. The profitability suffers as each competitor tries to make their product or service better (Dess, p. 54). McDonald’s has a $1.00 menu as does Burger King and Wendy’s. Each time I go into either of them there is a better item added to the $1.00 menu. For instance, McDonald’s has the scrumptious Double Cheeseburger and Wendy’s has the
This chapter sets out the rationale for price discrimination and discusses the two major forms of price discrimination. It then considers the welfare effects and antitrust implications of price discrimination.