This article describes a pricing strategy used by sellers, typically in markets that suffer from imperfect competition, significant transaction costs or imperfect information.
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- 1 Definition
- 2 Alternatives to apparent predatory pricing
- 3 Relation with other pricing strategies=
- 4 Legal regulation of this strategy
- 5 References
Predatory pricing refers to a strategy whereby a producer/seller with more capital and the ability to take a short-term loss sells a good at a significantly reduced price (thus incurring a loss) in order to drive competition out of the market, and with the aim of increasing prices eventually once the competition is out of the market.
Alternatives to apparent predatory pricing
There is little economic evidence for predatory pricing as a successful economic strategy. Often, what appears to be predatory pricing is something different. Further, even in cases where low prices drive competition out, raising prices is often difficult, because in the absence of significant barriers to entry, new competitors can always emerge to squeeze prices down again.
Lower prices due to significantly lower costs
Often, low prices that appear to be predatory are due to lower costs of production. These lower costs may be a consequence of economies of scale or different production costs (for instance, greater productivity, superior technology, different costs of labor and capital, different tax rates, different costs of regulatory compliance)
Relation with other pricing strategies=
Forms or variants of predatory pricing
- Penetration pricing: A variant of predatory pricing where a low initial price is chosen in order to achieve scale.
- Experience curve pricing