The Pros And Cons Of Predatory Pricing
Predatory pricing is an anticompetitive strategy that indents to drive competitors out of the market and gain monopolistic profits. The logic of predatory pricing is very simple. The predatory firm first lowers its price, to an extent which the revenue of the product does not cover the costs. The competitors must then lower their prices below average cost, thereby losing money on each unit sold. If they do not cut their prices, they will lose competitiveness; if they do cut their prices, they will eventually go bankrupt. (DiLorenzo, 1992) 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 predatory pricing is extremely rare or even economically irrational conduct. (Bolton, P. and Joseph, B. and Riordan, M., 1999) While such belief may be true in some circumstances, this essay discusses scenarios that contradicts such belief and reasons why the use of predatory pricing in these scenarios may be rational.
McGee (1958) argued that predatory pricing is never a rational choice. For example, a merger is always a preferred alternative to predation. McGee claims that when we consider two firms that operate in a single market and suppose that there is no possibility of new entry or of re-entry by a firm that exits, the profits of the merged firm would exceed the sum of the profits of the predator and the rival under the
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