Here’s a letter that I sent today to the Boston Globe:
Jeff Jacoby masterfully exposes as self-serving the American Booksellers Association’s complaint about the low prices charged for books by Wal-Mart and Target (“The war against affordable books,” October 28).
It’s sad but predictable that many business people oppose competition in their own industries. Rather than work harder to earn consumers’ dollars, businesses have a long and sordid history of protecting their profits by demanding that government hamstring their more entrepreneurial rivals.
Of course, these demands always are presented as noble quests to protect consumers from “predatory pricing” – price-cutting today that allegedly results in monopoly power for the price-cutters tomorrow. But despite the (also sad but predictable) fact that politicians and academics take concerns about “predatory pricing” seriously, history offers not a single clear example of price-cutting today, by private firms, leading to consumers being harmed by monopoly power tomorrow.
Reported sightings of predatory pricing are as credible as are reported sightings of Big Foot.
Sincerely,
Donald J. Boudreaux
As my friend Hans Eicholz notes, a far bigger — and far more real — problem than “predatory pricing” is predatory lobbying.
Podcast RSS Feed
Full EconTalk Text
{ 24 comments }
See, here’s the problem- how could you see examples of the effects of predatory pricing if it’s illegal?
It’s also the case that the mere threat of predatory pricing as a response to market entry could in itself deter competition, but this would be extremely difficult for an outside to actually observe.
“how could you see examples of the effects of predatory pricing if it’s illegal?”
First, it hasn’t always been illegal. Second, if the concept has any validity at all, then someone would have risked the illegal act in order to gain advantage. I can think of no law – even those which carry death sentence penalties – which has deterred every potential violator. Can you?
See, here’s the problem- how could you see examples of the effects of predatory pricing if it’s illegal?
It’s also the case that the mere threat of predatory pricing as a response to market entry could in itself deter competition, but this would be extremely difficult for an outside to actually observe.
Maybe one day even the most innovative companies like Intel will demand government bailouts and stimulus. Why not just completely socialize the economy and get it over with? I’m sure muirdog would be 100% for that.
Maybe one day even the most innovative companies like Intel will demand government bailouts and stimulus. Why not just completely socialize the economy and get it over with? I’m sure muirdog would be 100% for that.
Predatory lobbying. I like that expression.
Predatory lobbying. I like that expression.
Boudreaux: “… Reported sightings of predatory pricing are as credible as are reported sightings of Big Foot. … ”
You are either naive, blind or dishonest. Fifteen years ago I owned and operated a small trash hauling company with 30 employees. Waste Management (with $10 Billion plus in annual sales) had a major presence about 40 miles away and owned their own landfill. Disposal costs (i.e, landfill tipping fees) were our largest expense for the industrial customers that we serviced. Typically more than 60% of revenues from our industrial customers was paid out for disposal costs. A load that we would charge $500 would cost us $300+ at the landfill. When Waste Management decided that they wanted an account that we serviced they would offer to haul their trash for less than it cost us in disposal fees. They would offer to haul that $500 load for less than $300. They could do this because of their size and because they owned their own landfill. Despite our efficiency and quality service, it was difficult for my small company to compete against a behemoth that employed such tactics.
Boudreaux: “… Reported sightings of predatory pricing are as credible as are reported sightings of Big Foot. … ”
You are either naive, blind or dishonest. Fifteen years ago I owned and operated a small trash hauling company with 30 employees. Waste Management (with $10 Billion plus in annual sales) had a major presence about 40 miles away and owned their own landfill. Disposal costs (i.e, landfill tipping fees) were our largest expense for the industrial customers that we serviced. Typically more than 60% of revenues from our industrial customers was paid out for disposal costs. A load that we would charge $500 would cost us $300+ at the landfill. When Waste Management decided that they wanted an account that we serviced they would offer to haul their trash for less than it cost us in disposal fees. They would offer to haul that $500 load for less than $300. They could do this because of their size and because they owned their own landfill. Despite our efficiency and quality service, it was difficult for my small company to compete against a behemoth that employed such tactics.
Sounds like the consumer did well in that arrangement.
Sounds like the consumer did well in that arrangement.
And this harmed consumers how?
And this harmed consumers how?
I suppose it depends on your time frame. Short term it’s great for the customer. Long term it resulted in fewer choices, higher rates, and less pressure for the remaining companies to provide prompt service.
I suppose it depends on your time frame. Short term it’s great for the customer. Long term it resulted in fewer choices, higher rates, and less pressure for the remaining companies to provide prompt service.
Please cite specifics in re “fewer choices, higher rates, and less pressure…” Did it really happen, or did you just assume it would? Please be specific.
placebo: “You are either naive, blind or dishonest.”
Perhaps you and Professor Boudreaux disagree on what is meant by the term “predatory pricing’.
Your story reads to me as very simple case of competition. I don’t see how it’s predatory pricing. The fact that Waste Management owned a landfill gave it a competitive advantage over your company.
” it was difficult for my small company to compete against a behemoth that employed such tactics.”
What tactics? Using it’s economies of scale as a competitive advantage? Are you suggesting that consumers should not be allowed to reap the benefits of Waste Management’s competitive advantages?
I agree with the point Don is making, but what is the response to the second argument booksellers put forward: that, by lowering the price per book, authors are harmed, not because they don’t earn their percentage on the discounted titles – they do, no matter what Amazon charges on their end – but because the lowering of prices across the board will restrict the ability of publishers to offer those same rates to authors in the future – thus removing a portion of the financial incentive for writers to publish.
If authors are not being compensated enough to continue writing, then they will stop writing. Book publishers will have to pay authors more in order to obtain the books they need to stay in business. Simple supply and demand will determine the equilibrium price for authors’ labor.
If the public truly desires the millions of book titles offerred to them each year by publishers, the market will provide incentives to writers to produce those titles. Authors will find new methods for distributing and being compensated for their ideas. Some are publishing via the internet. Others are self-publishing their books. At the same time, publishers have found ways to limit their costs of book offerrings.
Trust the market, bafusilier. It is far more effective at meeting consumers’ needs than would be any form of government price restrictions. That’s why market economies offer consumers so many more book titles than planned economies ever can.
It appears that many libertarians take serious that a witnessing of predatory pricing is as credible as a bigfoot sighting. I realize how important it is for them to believe that the “free market” never harms the consumer. Unfortunately for the libertarian philosophy, and more so for the consumer, the pursuit of profits often works to the contrary. Overall I’ve benefitted more than I’ve been harmed by this. I was paid a handsome sum when I sold my company to one of the waste industry giants. But, I’d be lying if I said that the consumer benefitted when my company (and others under similar circumstances) ceased to exist. Currently, in this region, the nation’s two largest disposal companies, the new Waste Management and Republic Waste, control 90%+ of the market. The independent companies that are left are 1 and 2 truck operations that are limited to the rural fringe of this area. Rates are much higher here than just 50 miles away where Waste Management and Republic Waste have some real competition.
In response to johndewey: My definition of (and experience with) predatory pricing is when a dominant company offers unreasonably low rates with the short term goal of stifling competition, and the long term goal of charging unreasonably high rates once the competition is stifled. It ends up being a war of capital attrition that a small company has little chance of winning.
“Economies of scale” were not a factor in my case. I worked for the company that purchased mine. Their costs, especially overhead, were much larger than my company’s. Economies of scale is one of those things that is often promised during consolidations and mergers yet seldom delivered. Big companies mimic big government. They too frequently become inefficient, lumbering bureaucracies.
Small independent bookstores do not have a right to exist on the old business model. Innovate or die is the way of the free market. Now if a small independent bookstore wants to survive and thrive in the new reality where new hardcover bestsellers become commodity products, they need to figure out what would be profitable in their location. Maybe they need to offer a specialized collection of books and not carry the NY Times top 10 bestsellers, provide coffee and nice sofas, ambience, whatever.
Like I said, there is nothing in libertarianism that says any particular business is sacred and deserves to exist no matter what. So stop misrepresenting us.
placebo: “They would offer to haul that $500 load for less than $300. They could do this because of their size and because they owned their own landfill.”
placebo: “”Economies of scale” were not a factor in my case.”
I do not understand these two statements, If Waste Management did not enjoy economies of acale, then why didn’t you own your own landfill? If Waste Management did not enjoy economies of scale, why did their larger size make any difference when you competed with them?
placebo: “predatory pricing is when a dominant company offers unreasonably low rates with the short term goal of stifling competition, and the long term goal of charging unreasonably high rates once the competition is stifled.”Can you supply evidence that this is what occurred where you operated? I do not think that citing different prices in two different markets is evidence that Waste Management raised prices in the market you operated in after vanquishing all competition. If prices in your market are now above the $500 per load you were charging – after adjusting for increases in costs for inputs such as fuel and labor – then new firms should be able to enter the market and compete.How do you determine what is an unreasonably high or inreasonably low rate?
I’ve heard accusations of predatory lending as well but never understood what makes it criminal about it unless fraud is occurring. It seems like another buzz word anti-market folks throw around. Is this similar to predatory pricing?