Predatory Pricing and Trading

Predatory pricing is an anticompetitive measure employed by a dominant company to protect market share from new or existing competitors. It generally involves temporarily pricing a product low enough to end a competitive threat. Thus, the two major parameters under consideration are costs and the intent of the firm. Costs are usually easy to define yet there is a debate on the appropriate ones to use. Intent, on the other hand, is easier to comprehend yet most difficult to prove.

The exact legal (statutory) conditions for predatory pricing vary across the globe. In the United States, pricing below a dominant average variable cost (the Areeda Turner test) was last used by the Supreme Court in 1993 as a criterion for this practice in deciding Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. According to the Court, this practice arises when a business rival prices its products in an unfair manner in an attempt to eliminate competition and exercise control over prices in the market. While the law should protect price competition, it should distinguish unfair pricing practices that would eliminate competition. The basic antitrust dilemma is to distinguish price predation from hard competition.

Generally, the following conditions must exist to constitute predatory pricing:

• The predator must have the market power to unilaterally increase its prices.
• The predator must charge prices that fall below a predatory price standard (which varies from country to country).
• The predator should be able to recoup its losses after the competitors have been driven out of the market.

The predatory pricing argument is as follows. The predatory firm initially lowers its price until it is below the average cost of its competitors. The competitors are then forced to lower their prices below average cost, thereby incurring losses on every unit sold. They are then faced with a difficult situation: If they opt not to drop their prices, they are bound to lose their entire market share and their profitability in the long run; on the other hand, if they do cut their prices, they will also lose a lot of money. After forcing competitors out of the market, the predatory firm raises prices and recoups its losses in the short run and increases its profits in the long run.

Researchers over the past four decades have yet to provide a clear-cut example of a monopoly created by predatory pricing. Some contend that competitors who are unable or unwilling to cut prices make these claims. In most cases, the courts have wrestled with how to characterize price predation. So far, three tests have been used: (1) predatory intent, (2) below-cost pricing, and (3) likelihood of recoupment of costs. In most cases, they have considered a combination of these three cases.