Predation Flashcards
Does the Chicago school of thought agree with predatory pricing?
No, it believes predatory pricing is an irrational strategy because rational competitors will not exit the market simply due to temporary low prices. They believe that such threats are not credible as maintaining below-cost pricing is financially harmful to the predator itself. The school suggests that markets are self-correcting and that predatory pricing is not a viable long-term strategy, assuming that all players act rationally and have access to capital to withstand short-term losses.
What is predatory pricing?
Predatory pricing is a strategy where a business temporarily reduces its prices to below cost levels with the intent to drive competitors out of the market. Once competitors have been weakened or eliminated, the business can increase prices to higher levels to maximize profits.
What is the main goal of predatory pricing?
The main goal of predatory pricing is to eliminate or weaken competition so that the pricing company can control the market and increase prices to recoup losses and generate higher profits.
How does predatory pricing affect competitors?
Predatory pricing can force competitors who cannot sustain losses (due to lower prices) to exit the market or severely scale down their operations, leading to reduced competition.
What are the long-term effects of predatory pricing on a market?
In the long term, predatory pricing can lead to market monopolies or oligopolies where few firms control the market, potentially leading to higher prices for consumers and less innovation.
How do regulators typically view predatory pricing?
As an anti-competitive practice that harms the market and consumers. It is often illegal under antitrust laws and can lead to legal action against the perpetrating company.
What is the long-purse or deep-pocket theory of predatory pricing?
The long-purse or deep-pocket theory of predatory pricing highlights the financial capability of firms as the crucial factor in predatory pricing strategies. According to this theory, the significant difference between firms isn’t their market position (incumbent vs. entrant), but their financial strength. A firm with more financial resources (deep pockets) can sustain below-cost pricing longer than a financially constrained firm, potentially forcing the latter to exit the market if they cannot secure additional funding like bank loans.
What is low-cost signaling in the context of predatory pricing?
A strategy used by an incumbent firm to reduce prices aggressively, not to drive competitors out directly, but to signal its low operational costs to the market. This action communicates to potential and existing competitors that the incumbent can sustain lower prices long-term due to superior cost efficiency, thereby deterring entry and discouraging competition.
What does “Reputation for Toughness” mean in the context of predatory pricing?
“Reputation for Toughness” refers to a strategy where an incumbent firm uses predatory pricing to build a reputation as a tough competitor. By aggressively lowering prices in response to new entrants or competitive threats, the incumbent aims to discourage future competitors by demonstrating that it will respond fiercely to any market entry. This reputation can deter potential entrants from coming into the market, fearing unsustainable price wars or financial losses, thus protecting the incumbent’s market position.
How do “Growing Markets” serve as an explanation for predatory pricing?
In growing markets, predatory pricing can be a strategic tool to secure significant market share early on. This approach is crucial because establishing a large customer base quickly can lead to long-term success. By lowering prices temporarily, a firm can deter new entrants, discourage competition, and attract a substantial number of customers. This early dominance can be pivotal as it sets the foundation for sustained market leadership, benefiting from economies of scale and customer loyalty as the market continues to grow
Predatory pricing may be successful when…
(1) the prey is financially constrained,
(2) low prices signal low costs or the predator’s “toughness,” and
(3) capturing a minimum market share early on is crucial for long-term survival.
