In this article, we’ll define predatory pricing and take a closer look at how it works, its short- and long-term effects, and real-world examples.
Key Takeaways
- Predatory pricing is different from competitive pricing. It is a pricing strategy that aims to create a monopoly by setting lower prices.
- Predatory pricing is illegal. It goes against antitrust and fair competition laws, which keep the playing field level for businesses while also protecting consumers.
- Predatory pricing is harmful for consumers in the long term and even carries significant risks for the business engaging in it.
How Does Predatory Pricing Work?
Predatory pricing is a strategy that unethical businesses adopt for customers to flock toward their goods or services and away from competitors—often those with smaller financial reserves. These smaller competitors will lose business and income; some will even have to close down. Once no competitors remain, the predatory business—which has survived due to greater financial reserves—will increase its prices again, leaving buyers paying high prices with no alternatives.
Predatory Pricing vs Regular Competitive Pricing
The ultimate goal of predatory pricing is to shut down competing businesses by starving them of customers and profits. On the other hand, if a business sets prices that are low but not below cost, and there is no indication of an attempt to destroy competition by setting unrealistically low prices—then the business is just using regular competitive pricing.
Predatory Pricing: Legal Considerations
Predatory pricing is illegal. It is considered a violation of the laws that protect consumers and keep the business landscape fair and competitive. However, simply pricing your products and services lower than your competitors’ does not immediately violate these laws and prove that a business is using predatory pricing.
A business is free to set any price it chooses for the products and services it offers, and pricing lower than the competition is in itself a valid and legal business strategy. Even if a business chooses to set its prices below its own business costs, this is not necessarily a violation of the law—unless it is part of a bigger strategy to gain an unfair business advantage.
Thus, predatory pricing can be difficult to prove and prosecute in court. So, apart from just low pricing, investigators look for evidence—such as business or consumer correspondence or articles on consumer or economic subjects—to determine whether a business is deliberately engaging in predatory pricing.
Short- & Long-term Effects of Predatory Pricing
Large businesses with deep pockets are usually the ones that engage in predatory pricing because they have the resources to win a price war with smaller competitors. As a small or relatively new business, you will need to stay alert for larger competitors that might try to attempt this tactic.
For customers buying from a business engaging in predatory pricing, the short-term effects can be exciting and pleasant. Because of very low pricing, buyers can enjoy receiving goods and services for cheap. However, once all its competitors have exited the market, the business will ramp up its prices to monopoly levels. Buyers will then have to deal with massively increased prices for the same products and services while also realizing that they have no alternative businesses to turn to.
Predatory pricing even has potentially harmful effects on the business that practices it. Initially, the business sets prices so low that it loses money for a time. There is no guarantee that it will be able to make up for these losses later on, even when it has raised its prices again. New rival businesses and competitors could also enter the arena at any time.
Predatory Pricing Examples
Here are a few examples of predatory pricing or similar tactics:
- In 2000, the Wisconsin Department of Agriculture, Trade and Consumer Protection filed a complaint against Walmart, accusing the latter of violating antitrust laws. According to the government department’s complaint, Walmart had been selling staple grocery products at below-cost prices in several of its stores, with the intent to force competitors out of the market. Walmart had previously been served warning letters back in 1993.
- In 2012, Amazon sold electronic books at very low prices to attract buyers for its Kindle product; eventually, the company began selling the Kindle itself at a loss. What’s more, Amazon developed an app that let consumers check book prices in brick-and-mortar bookstores—and then claim a discount if they bought the same item from Amazon. These moves made business difficult for competing booksellers and publishers, some of whom accused Amazon of predatory tactics and expressed a desire to see the company investigated.
- In 2020, ride-hailing service company Sidecar Technologies Inc. accused Uber Technologies of predatory pricing and other tactics that unfairly stifled competition. These alleged tactics included booking and then canceling rides on competitors’ apps, disrupting their business, and frustrating both drivers and passengers. According to the complaint, Uber also offered attractive driver incentives and low passenger fares to gain more customers; however, Uber eventually reversed these moves.
Frequently Asked Questions (FAQs)
Click through the following sections to learn more about the definition, legal status, and protections against predatory pricing strategies.
Predatory pricing is a strategy in which a company temporarily lowers its prices drastically, sometimes to below-cost levels. The company does this to pull customers away from competitors, who will then lose business and have to close down. Then, once it is the only business left in the market, the predatory company will raise prices significantly.
Predatory pricing is illegal. It goes against laws designed to protect customers from paying excessively high prices. It also goes against laws that keep the playing field equal for all businesses in the market. Predatory pricing destroys the concept of businesses trying to outdo each other in terms of quality; that kind of competition is a good thing for consumers.
In the US, antitrust laws are enforced at the national level. However, you’ll need solid evidence if you’re going to accuse a company of predatory pricing. Namely, you’ll need to show a likelihood that the company’s pricing strategy prevents fair competition in the market.
Bottom Line
Predatory pricing may have some short-lived benefits for a company that decides to engage in it, but the practice is ultimately risky and harmful for the company, and detrimental for customers—not to mention illegal. As a small business in a market with powerful competitors, you’ll need to keep an eye out for rivals that may resort to this tactic, so that you can plan your defenses and protect your interests. If you believe that a rival company is engaging in predatory pricing and you decide to file a formal complaint or voice your concerns, you can do so with the Justice Department Complaint Center website.
