Pros And Cons Of Predatory Pricing

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There are several interesting topics professor Aggarwal discussed in Econ 140, the two topics I found most interesting were predatory pricing and vertical integration. Predatory pricing is a method used by firms to lessen competition by essentially eliminating them out of the market. It is the act of charging a price below the firm's own marginal cost in order to drive out a rival out of the market. Once the firm successfully drives the rival out of the market it is free to increase its price and charge its desired price. Predatory pricing is only optimal when the firm’s present value of the future profits is greater than the loss profits needed to drive out competitors. The predator must have the sufficient amount of financial resources to participate in such an act, so it can outlast the prey, the competitor. The two firms therefore compete in a price war which is beneficial to the consumer during the price war, however when the predator wins it will essentially have a monopoly and drive up prices far more than usual. Predatory pricing is an illegal act, however it is difficult to prove due to the fact that it can be portrayed as price competition and not a deliberate act. It is not illegal for a firm to lower its pricing as it could be seen as a competitive action. The Federal Trade Commission carefully examines claims of predatory pricing for this reason because it is legitimate business practice. Strict enforcement of rules against predatory pricing could lead to firms

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