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What is Predatory Pricing?
Predatory pricing refers to an illicit, anti-competitive strategy of setting prohibitively low prices in the hopes of eliminating rivals and achieving control. After cutting out the competition, the predatory business can charge exorbitant prices as consumers do not have anywhere else to purchase the goods they want or need. Using this strategy constitutes a violation of U.S. antitrust law, as it risks markets turning into a monopoly or oligopoly.
Most markets thrive when competition is stiff. That means businesses are focused on developing the best products, at affordable prices, in order to stay ahead of their competition. In other words, what businesses should be doing. Not engaging in crony capitalism by setting up barriers to entry, or rent-seeking. The public, in turn, gets to enjoy a wealth of great options that best suits their needs and budget.
The Zero Theft Movement strives to achieve an ethical economy that’s productive for the public and businesses. That takes bringing the public together to collectively eliminate rigged economic behavior, such as predatory pricing.
How Predatory Pricing Works
You’ve probably heard some news, read a story, or maybe seen a movie showing the decline of small town business when corporations arrive. Predatory pricing is one potential reason for the growing trend.
Imagine you’ve got a local mom and pop store that’s serviced a small community for decades. It could be a grocery store, a parts store, etc. But one day, a multinational corporation decides to set up shop a few doors down. You can find much of the similar goods in both—albeit perhaps of differing quality. The major difference is: the corporation, with its established supply chain, can still make a good profit selling its stock at cheaper prices than the mom and pop shop could sustainably offer.
While the community wants to stay loyal to the owners of the mom and pop shop, the prices at the corporate store just cannot be beaten. Life’s not exactly luxury as is, and community members could stand to save a bit more money for retirement, college for their children, etc. So they start shopping at the corporate store, and the mom and pop’s sales dip fast. In order to stay afloat, the local reduces its prices prohibitively low in order to at least get some sales.
After experiencing months of pricing pressure, the owners of the mom and pop shop decide to cut their losses and close up shop. The corporate store, now a monopoly, raises its prices beyond what the local store ever charged. Customers have no other option but to pay the high prices to get what they need.
As you can see, businesses (especially those with big money backing) can handle the initial reduced profits in order to ultimately profit much more over the long term. But if you take just a second to think about who’s paying those extra revenues, you’ll quickly see that it’s you and the rest of the public.
According to a report by the Institute for Local Self-Reliance, “Most Americans have no real choice in internet providers.”
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Competitive Pricing vs Predatory Pricing
In reality, though, it’s hard to pinpoint exactly where competitive pricing ends and predatory pricing begins for a few reasons.
Lowering prices
Competitive and predatory pricing both involve lowering prices. For the former, market rivals might lower their prices or offer bigger sales in order to increase sales as much as possible. Not necessarily to gain total market control, but so that they can gain a bit more of the market share. Predatory pricing, by definition, also involves later price hikes, when a predator has dealt with its competition. Such blatant violations of antitrust obviously would not go over well.
So it comes down to proving a business, or businesses, has deliberately dropped prices in order to undermine competitors and take control over the market.
Think of it this way. When you go to your favorite store to take advantage of a deal or sale, do you question whether the owners are doing something unethical or illegal? No, and that’s for good reason. Marking down prices to attract customers is common business practice, and there’s absolutely nothing wrong with doing so. This just goes to show how difficult it can be for prosecutors to actually prove a business has deliberately cut prices to eliminate its competition.
A risky tactic
Furthermore, predatory pricing doesn’t guarantee success. Just because a business lowers prices does not mean it can actually eliminate its competitors. And while it might make more sales due to the discounted prices, it could lose too much revenue to continue on the strategy before it reaches a successful outcome.
Predatory pricing can actually spark a ‘price war,’ where competitors aggressively cut prices in order to increase their own market share. Consumers actually benefit in the short run, as prices will be cheap in the market. New entrants might also see an opportunity to join the market while it’s in a state of flux. Thus, fierce competition, unintentionally spurred by predatory pricing, can lead to a buyers’ market: consumers not only buy the commodity at lower prices but also have increased leverage and wider selection.
Antitrust Laws Against Predatory Pricing
The difficulties of parsing competitive and predatory pricing have made it difficult for lawmakers and regulators to properly monitor and punish it.
For the U.S. Supreme Court to take claims of predatory pricing seriously, plaintiffs must show how the alleged predators’ pricing practices will harm rivals and competition in the market as a whole. The specific intent and reasonable potential of success for the predator to monopolize a market must be demonstrated.
Moreover, the Court has a strict value requirement for what it considers predatory pricing. Even if a product gets put on sale for 75%, or is priced ‘aggressively low,’ that does not necessarily count as evidence of predatory pricing. The business must set the price below its costs. Though, proof of this does not provide sufficient evidence alone for the Court to pursue the case.
Thus, because of the many requirements set by Court precedents and antitrust law, actual cases of predatory pricing do not arise particularly often.
Predatory Dumping: International Predatory Pricing
As the economy continues to globalize, international predatory pricing can even occur. Market predators can attempt to conquer a foreign market by selling a commodity at a cheaper price than the local brands do. Predators must deal with the people treating the ‘dumped’ goods as opportunities for arbitrage. Some might capitalize on the cheap foreign prices by buying the goods online and reselling them back in the local/national market for a considerable profit.
A famous potential example of this kind of predatory-pricing scheme emerged in the 1970s. Zenith Radio Corporation, one of the largest U.S. TV manufacturers at the time, was losing its market share. The company accused Japanese firms of collusion, believing they’d banded together to sell televisions at low prices in the U.S.
Before Zenith’s case could really take off, the Supreme Court outright rejected the accusations. Zenith continued its freefall and eventually filed for Chapter 11 bankruptcy in 1999.
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Amazon Antitrust & Predatory Pricing?
Yale Law student Lina M. Kahn created a bit of controversy when she published a ‘note’ arguing that Amazon has “generated meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it.”
The antitrust concerns Kahn raises ultimately boil down to whether Amazon’s expansion strategy will ultimately lead to competitors getting priced out.
Bloomberg, for example, has reported on a potential way Amazon has started its transition towards capitalizing on its considerable market share. The news outlet claims, “[Amazon] has abruptly stopped buying products from many of its wholesalers, sowing panic. The company is encouraging vendors to instead sell directly to consumers on its marketplace. Amazon makes more money that way by offloading the cost of purchasing, storing, and shipping products. Meanwhile, Amazon can charge suppliers for these services and take a commission on each transaction, which is much less risky than buying goods outright.”
In These Times, a nonprofit news organization, chimed in on the matter, reporting, “…if Amazon is recouping losses from a predatory pricing scheme by reducing its costs, the windfall profits aren’t being transferred to customers. In addition, a supplier to Amazon is hindered from improving its products, because Amazon is skimming profits off the top that could be put toward innovation.”
In January 2021, a class action lawsuit was filed against Amazon. It alleges that “[Amazon] colluded with major publishers to illegally drive up e-book prices by 30%.” The e-commerce giant has also faced antitrust charges from the European regulators in late 2020, according to NPR.
How the Zero Theft Movement Helps End Predatory Pricing
While predatory pricing can prove hard to detect, the public and the economy will suffer if such schemes actually succeed. We cannot let this nation become a corporatocracy. We must protect competition, options, and innovation.
And you can contribute.
On our voting platform, citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.