Predatory pricing

This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly.

[1] For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss.

[4] If strategy is successful, predatory pricing can cause consumer harm and is, therefore, considered anti-competitive in many jurisdictions making the practice illegal under numerous competition laws.

[9] Assessing other factors, such as barriers to entry, can suffice in demonstrating how predatory pricing can lead to foreclosure of competitors from the market.

Due to this, countries often have laws and regulations enforced to prevent dumping and other forms of predatory pricing strategies that may distort trade.

Legal sanctions for predatory pricing are compensatory damages or administrative penalties, while dumping involves the levying of anti-dumping duties.

The objective performance of predatory pricing is that a company temporarily sells goods or services below cost to eliminate competitors from a certain market and create exclusivity.

However, under EU law, market power is not necessary to establish predatory pricing,[16] since other factors such as barriers to entry can indicate an abuse of a dominant position.

[19] In EU law, the approach to testing for predatory pricing under Article 102 of the Treaty on the Functioning of the European Union (TFEU) has been explained in a number of important cases.

[20] The Court of Justice upheld this decision for the inclusion of other factors (such as proof of intention to eliminate competition) to be taken into consideration alongside a cost-based analysis.

[24] In Post Danmark I, the Court of Justice developed upon AKZO by stating that prices above average incremental costs but below ATC would not likely be ruled abusive under Article 102 of the TFEU if there was no evidence the dominant firm deliberately intended to eliminate competition.

[30] William Baumol proposed a long-term rule seeking to avoid full reliance on cost-based tests to determine predatory pricing.

[33] Craswell and Fratrik suggest that establishing a legal standard to detect predatory pricing in the retail industry is unnecessary and should not amount to an antitrust violation.

The primary reasoning was that predatory pricing typically requires strong barriers to entry to generate profits in the long run, which are absent in the retail grocery industry.

[38] A prevention period of 12 to 18 months should be adequate for new entrants to establish a market identity and understand economies of scale while disincentivizing dominant firms from holding excess capacity.

[40] The plaintiff must demonstrate that the market in which the behaviour occurred would be prone to predatory pricing and cause losses in economic efficiency.

Under this rule, to be found guilty of predatory pricing, the plaintiff was to prove the following: The first element can be proven with sufficient evidence of defendant's costs in the production of their goods and services.

The third element would require direct evidence to clearly demonstrate the defendant's plans to manipulate the market through use of predatory pricing strategy.

[41] If all elements can be proven with sufficient evidence for each, following the Brooke Group rule, the plaintiff may claim for predatory pricing under the US antitrust law.

The Act defines the strategy as a dominant firm employing the method of undercutting or underselling with the intention to force competitors to exit or prevent entry to the industry.

The Court requires plaintiffs to show a likelihood that the pricing practices affect not only rivals, but also competition in the market as a whole in order to establish there is a substantial probability of success in monopolization.

[49] If there is a likelihood that market entrants will prevent the predator from recouping its investment through supra-competitive pricing, then there is no probability of success and the antitrust claim would fail.

The US Department of Justice, however, argues that modern economic theory based on strategic analysis supports predatory pricing as a real problem, and claims that the courts are out of date and too skeptical.

[50] Article 102 of the Treaty on the Functioning of the European Union is the relevant statutory provision under EU law for dealing with predatory pricing.

[51] If Article 102 is breached by a predatory pricing practice, the European Commission may intervene as they prioritize dealing with "exclusionary abuses" which exclude competitors from the market.

10, Федерального закона от 26.07.2006 N 135-ФЗ "О защите конкуренции") deals with unilateral conduct of economic entities by prohibiting abuse of dominant position.

The section is very similar to article 102 of the Treaty on the Functioning of the European Union governing the anti-monopoly laws within the EU jurisdiction, with the exception of parts regarding the effect on trade within the UK.

[65] According to economist Thomas DiLorenzo, true predatory pricing is a rare phenomenon and an irrational practice with laws designed to inhibit competition.

[70][71] According to the Chicago School of Thought advocated by Robert Bork, predatory pricing is not always anti-competitive even if it ends a successful strategy.

For example, dominant undertaking could argue that changing market conditions have caused reduced demand but increased capacity, and therefore below-cost pricing was necessary in the short-term to sell off fresh produce.