Predatory Pricing

Predatory Pricing

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Predatory Pricing

Introduction

            The profitability of companies is dependent on a variety of factors. Among the vital issues to consider is the price of the goods or services to be offered. The process of decision making for such a critical part of the firm has to be informed by factors such as the presence or absence of demand, overhead costs and competitor activities. Therefore, predatory pricing is a technique in which merchandise are deliberately priced lower in order to drive rivals out of a specific market (Alese, 2008). However, it can also be used to deter other organizations from entering a certain market thereby creating a virtual monopoly. This is because such businesses will be forced to lower their price further and that may not be sustainable in the long term. Hence, this method curtails competition, which increases animosity among rival companies due to the creation of a business environment that is favorable to a single or limited group of companies.

Examples

In the year 2000, Wal-Mart was accused of engaging in predatory pricing strategies by pricing goods below the cost in a number of its stores in the US and Germany. It was revealed that the prices of laundry detergent, milk and butter were significantly lower in Oklahoma, Wisconsin and other German outlets than their rivals located in the same areas. In particular, it was alleged that Wal-Mart reduces the price of corner products. Since these are basic items that customers have advance knowledge of their price, when they visit any Wal-Mart store, they are bound to believe that most of its products are relatively priced. In this way, the firm intends for customers to switch their allegiance and shop at its stores. Such an outcome would have led to the closure of many small-scale businesses, as they would not compete with the giant Wal-Mart store chain. It was thus ordered to normalize its prices at these stores. These instructions were meant to return the retail business environment back to normalcy by avoiding upsetting the markets or causing panic among the buyers (Wilkinson, 2005).

Similarly, Esso and Shell have come under the same indictment in which they have been known to sell fuel at wholesale prices that are higher than the actual retail prices to other franchised dealers. In particular, the amount that these oil companies pay for fuel to stations that are owned by these corporations is lower. This scenario makes fuel to be more expensive in individual entities as opposed to franchises that these organizations have a stake. Hence, more people will rush to the latter especially now that economies are facing austerity measures. With a decline in sales, the other marketers will be driven out of business since they will not be able to operate at a profit. Thus, a fuel crisis could occur much to the detriment of motorists.

In addition, Amazon, the online retail store initiated a policy of free delivery of items to its customers. This customer care exercise was meant to enhance the loyalty of consumers while also increasing brand visibility in France. However, other establishments that dealt with similar products faced a dilemma because they used to charge shipping fees. Moreover, they could not just reduce their prices without incurring huge losses that would have hampered their activities. Thus, the French government felt that Amazon had violated antitrust laws by placing rival firms at a disadvantage. Whereas the company was fined for its actions, it decided to pay the one thousand euros per day penalty instead of charging its customers for the delivery services.

From 1986-1995, the UK bus sector in Darlington town experienced a huge increase in predatory pricing. With the formation of Darlington Transport Company and Stagecoach group, these firms began competing for bus routes and higher fleet management. Both rushed to acquire licenses for special zones hence leading to congestion and decline in sales. At the height of the rivalry, Stagecoach decided to give passengers free rides on its buses irrespective of an individual’s destination. This move made other bus companies to reel in debt after the exhaustion of their cash reserves. Since Stagecoach was gaining popularity and passenger numbers, other organizations suffered from the dwindling commuters. Moreover, the situation grew worse that Darlington Transport Company had to file for bankruptcy and look for new buyers.

Criticisms

            It has been clamed that the various laws that have been designed to curb predatory pricing have in fact inhibited competition. This stems from the fact that most competitors with enough financial resources do not bother to reduce their prices, as they know that the predator will not continue with the practice for a long time. Therefore, they assume the new developments and carry on with their day-to-day operations. Furthermore, critics have been quick to point out that the exit of a competitor from a market that is riddled with predatory pricing does not signal an end to organizations involved in the same industry (Basedow & Wurmnest, 2011). In fact, other firm’s may use that opportunity to purchase the collapsed corporations and set on a cause to revive them. In this way, the predator does not benefit significantly from this illegal practice. However, another tactic that can be used is the involvement in complimentary business whereby a firm invests in goods and services that are essential in the running of the predator’s industry.

Support

            There are increasing opinions on the viability of an organization forcing rival teams to quit markets through the pricing of its goods and services at low rates. Nevertheless, there is no likelihood of the company, which would enjoy monopoly, raising the cost of the same goods. This is because other businesses will then get the desire to return to these markets in order to exploit the demand for higher-priced items. Thus, the resumption of competition would trigger a reduction in the yield on investments. Since such undertakings are capital intensive, the predator is better off maintaining the new low price. In the process, it is able to enjoy a monopoly in the market.

Conclusion

            Global markets have become competitive since every organization would like to increase its customer base. This has forced most companies to seek alternative ways of attracting and retaining consumers. As such, some have settled on the lowering of prices to considerably small levels in order to penetrate a market. However, this has caused rival firm’s to experience a decline in sales as they battle to raise income generation without necessarily lowering their prices too. Therefore, predatory pricing has had a negative effect on the attitudes of workers within the same industry. Even though antitrust laws have been drafted in almost all countries, this habit persists and threatens certain sectors such minimal competition creates a monopoly. In the end, consumers have limited options from which to choose the various items according to their preferences.

References

Alese, F. (2008). Federal antitrust and EC competition law analysis. Aldershot, England: Ashgate Pub.

Basedow, J., & Wurmnest, W. (2011). Structure and effects in EU competition law: Studies on Exclusionary Conduct and State Aid. Alphen Van den Rijn: Kluwer Law International.

Wilkinson, N. (2005). Managerial Economics: A problem-Solving Approach. New York: Cambridge University Press.