Predatory Pricing

Predatory Pricing |

Final Paper |

|

Tonya Henderson |

5/30/2013 |

I. Introduction

In most general terms predatory pricing is defined in economic terms as a price reduction that is profitable only because of the added market power the predator gains from eliminating, disciplining or otherwise inhibiting the competitive conduct of a rival or potential rival (Bolton, Brodley, & Riordan,n.d.).Predatory pricing is a multi-step process for obtaining monopoly market share and profits. The first step of the process involves lowering the price of an item below cost with the hopes that competition will do the same, ultimately causes the competition to lose money and driving them out of the market. If this step is successful the firm now has the market and they can proceed to the next step. The next step is to ultimately make money. Now that the firm has the market to itself it can set the prices to regain its losses. With the firm being the dominant firm it can charge a monopoly price to recoup its losses and establish a steady stream of profits for the future. This practice is nothing new to the American market.

The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit trusts (Sherman Anti-Trust Act 1890,n.d.). According to section 2 of the Sherman Act monopolies are prohibited under the federal antitrust laws. It states that every person who shall monopolize or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any party of the trade or commerce among several states or with the foreign nation, shall be deemed guilty of a felony (Twomey & Jennings,2014). To determine if a firm has engaged in such activity is at the discretion of the courts. Even with numerous cases of price gouging and a firms engaging in predatory pricing there are still skeptics if it truly exists. Many judges and lawmakers believe there are too many variables that would prevent a firm from conducting...