Predatory Pricing, Product Improvements, and Wal-Mart

by Don Boudreaux on April 25, 2011

in Antitrust, Competition, Wal-Mart

Back in 1996 I contributed this article to a collection of antitrust essays assembled by the F.T.C.’s Malcolm Coate and Andy Kleit (now at Penn State). In it, I discuss a mid-1990s case (in Arkansas courts) against Wal-Mart for allegedly pricing “predatorially” in the Faulkner County, Arkansas, retail pharmaceutical market.  More generally, I lay out some reasons why investments in a predatory-pricing campaign are highly unlikely to be a sensible strategy even for the most egregious monopolist-wannabe.

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{ 25 comments }

Justin P April 25, 2011 at 3:27 pm

How many instances have their been where a company goes on a campaign of “predatory pricing” that actually worked? (Where they drive competition out and then raised prices up to monopoly like levels)

If my knowledge of WalMart is correct, all they are doing is using their supply chain as a source of competitive advantage, and the anti-trust case is more of competitors trying to destroy the competition’s source of competitive advantage.

At what point does anti-trust suits become recognized as a source of destroying competition?

kyle8 April 25, 2011 at 6:52 pm

That is a good question. Many in modern economic circles are decidedly anti anti-trust.

While I admit that many times anti-trust legislation is misused and abused. I cannot be totally against it.

The public always benefits from increases competition. Walmart is not in any way a monopoly. However, if it would in some way come to dominate let us say over 50% of the entire retail market, then it would become so.

At that point the walmart haters might have a legitimate point on any one firm having too much power. Not only monopoly power but the power it would have over wholesale purchasing and even the local work force.

However, that really cannot happen unless government becomes involved. No natural monopoly or trust can last without government help.

geoih April 26, 2011 at 6:58 am

Quote from kyle8: “However, if it would in some way come to dominate let us say over 50% of the entire retail market, then it would become so.”

Is 50% market share now the definition of a monopoly? And if you can’t have a monopoly without government help, then how could Walmart ever be a monopoly? Walmart is almost universally hated by government.

Your analysis is not logical. If you don’t like Walmart, then don’t shop there.

kyle8 April 26, 2011 at 7:05 am

My argument is logical, it is a hypothetical. And no, 50% would not be a monopoly per se, but it would be enough to have monopoly like control over the three areas I described.

Ken April 26, 2011 at 11:19 am

I teach a case in my marketing strategy classes using Walmart and the Fast Company articles “The Wal-Mart You Don’t Know” and “The Man Who Said No to Wal-Mart” to illustrate the impact of distribution decisions on marketing strategy and firm performance. The first article was published in print in 2003 or 2004, and at that time Walmart’s share of total U.S. retail business was about 7%.

Basically, it’s an object lesson: Don’t pursue intensive distribution unless intensive distribution is compatible with the other elements of your brand’s/company’s strategy.

geoih April 26, 2011 at 2:37 pm

You have a subjective definition of a monopoly that you keep changing (50%, 100%, government supported). You’re simply making up things that you don’t like, with no concrete reasons why.

Justin P April 26, 2011 at 9:02 am

I’m not totally against Anti-trust as well. I think a better use of Anti-trust would be to break up “to big to fail” instead of propping them up. That said, I still think the majority of anti-trust cases are being used to try and destroy competition. It goes with the rash of patent suits brought by Apple, who wants to destroy it’s competition, Google and Samsung. Of course, I’m biased against Apple. But at least I acknowledge my biases, the Wal-Mart haters never do.

John Sullivan April 25, 2011 at 4:44 pm

Lowering pricing to drive out competition is how wealth is created, if properly measured from the perspective of the consumers. Of course, companies will raise prices if they eventually can, but that usually invites competitors back in. The time it takes competitors to re-enter the market varies from industry to industry, but it’s rare that all the competitors were driven out of the market in the first place, so remobilization is usually quick.

Anti-trust laws, and their reference to predatory pricing, was invented by companies who couldn’t compete, and who turned to politics as a way of attempting to compete. Prices only went up if the weaker competition won their legal challenges. In other words, anti-trust laws only lead to higher prices, less competition and a reduction in the total wealth of the society that impliments them.

Anti-Trust, like protectionism, succeeds only because humans are envious of success and like to tear down anyone or group who does substantially better than most.

I recommend anyone looking for empirical eveidence on this subject to read Dominick T. Armentano’s books on it. Mr. Boudreaux apparently has, or at least he holds all the same views from his own research.

kyle8 April 26, 2011 at 7:10 am

Anti trust laws were not created by business that could not compete. They are USED by companies to try and punish competitors.

They were created as a response to a very real problem, which was the creation of large trusts in the nineteenth and early twentieth century. These were created with the connivance of (usually state) governments.

One might say that these laws are now obsolete. I think there might still be a use for them. But like all legislation, they have been used to overstep their bounds.

Justin P April 26, 2011 at 9:04 am

“Anti trust laws were not created by business that could not compete. They are USED by companies to try and punish competitors.”

Probably just arguing symantics, but I’m sure those laws where put into place by the Bootlegger and Baptist mode of regulation.

John Dewey April 26, 2011 at 11:43 am

kyle8: “Anti trust laws were not created by business that could not compete.”

Are you sure about that, kyle? I have read that the Sherman Antitrust Act was promoted by members of Congress by businesses which were losing out to larger, more efficient rivals.

I’ve also read that the Robinson Patman Act Of 1936 was inititiated by Wright Patman because small grocers and retailers objected to the volume discounts being granted to large chains. As I understand it, the volume discounts were available to everyone, but only the larger businesses found it efficient to take advantage of them.

John Galt April 25, 2011 at 5:17 pm

Exactly so, Justin. Walmart is providing drugs, which the 90,000 Faulkner Cty residents can purchase or else use Walgreens, Sav-On Drugs, Fred’s Pharmacy, Medicine Shoppe, Baker Drug, Kroger Pharmacy, US Compounding, Vilonia Drug & Florist, or mail-order options.
There is no potential for these residents to get any justice or benefit in these litigations. Instead of allowing Austrian Economics to flourish, the taxpayers are taxed to pay the aristocracy to prance about in powdered wigs doing a stylized militaristic Viennese waltz.
Behind this dancing with the czars, barristers, & regulatory dandies, lurk the post-Orwellian Atlas-thugged database-keepers, process restrictors, police incarcerators, surveillancers, and assassination soldiers & drones.
The mountains of corpses & skulls next to live victims keep Joe sixpack in an infantile stupor so that Boudreauxian-style analyses are unable to be heard, much less considered and acted on.

John Sullivan April 25, 2011 at 5:56 pm

John Galt, This is the stuff of novels. Very good, but are you trying to say that Joe Sixpack is an innocent bystander in all this? Hardly. The Joe Sixpacks of the world are the first to vote against free trade and unregulated markets.

If you focus your obviously formidable intelligence on a more expansive market than the one espoused by Austrian theory, or Ayn Rand, you will come to appreciate it’s perfect workings, and the fact that it always operates at maximum efficiency. This is the market of power, not the theoretical market of contract. The market of power is the only true and accurate market. It is the only market based on a realistic understanding of human nature, which seeks to maximize one’s desires, as understood by the acting individuals, not others, and not society as a whole.

Joe Sixpack is as selfish as the monopolist. Like everyone, he’s only idealistic regarding things he has no power to have.

The society that Ayn Rand advocates is one that is beneficial mainly to people with above average intelligence; to the people who tend to gain from their productive endeavors. To the losers in life, free markets subjects them to a competition that they’ll fail at, so it is logical that they consider other avenues.

Imagine a desert island whereby the small population is divided into 2 groups. One are smart people who are physically weak and the other are stupid people who are physically strong. The smart people will succeed using their brains and the strong people will succeed by stealing from them, using force. I hardly think the stupid people will be influenced by the speeches of John Galt, Ayn Rand, or you, no matter how eloquent. Humans use what nature provides them, and in today’s case, democratic majorities simply don’t care for allowing free markets to enrich those who are more gifted than them. Theft is much easier.

The best way to end up with a free market is to exploit people whenever possible, by whatever means suited to your emotional disposition. Let others stop you, and the ideal society in your mind might come about by chance.

John Galt April 26, 2011 at 3:01 pm

I would say innocense or guilt of bystanders is in the eye of the beholder except where one trespasses against another bystander or actor.

The market of power sounds like utopia to me. I was once master of just such a market until around age 8 when my younger siblings began colluding to circumvent my physical & mental superiority. Turns out most everyone finds individuality over-rated. It’s character they value most I’d say.

Chris O'Leary April 25, 2011 at 5:34 pm

It seems to me that so much of this argument ignores the psychology of pricing.

For one thing, the lowest price is a concern for raw commodities, but those are rare. Real people understand that there is more to life than price (e.g. service).

There’s also the issue that it can be hard to raise prices after cutting them, which makes predatory pricing a straw man.

Ken April 26, 2011 at 12:31 pm

All true.

Let us assume I am a manufacturer of #8×1″ coarse-thread, pan-head, galvanized Phillips sheet-metal screws. You can get more commodity than that, but it ain’t easy.

Even so, there are ways other than price in which I can differentiate myself from my competitors, particularly in B2B markets.

I can get really good at delivering on time, in precisely the required quantity.

I can reduce the number of defective screws per million to zero.

I can offer superior delivery flexibility (last-minute quantity change? No problem!)

I might even be able to show you how to get the same structural strength in your assembly with a couple fewer fasteners, or more strength with the same number of fasteners, or possibly replace some expensive specialized fasteners with mine by making a couple of simple modifications that would reduce your overall cost without compromising quality.

None of these things are particularly easy, and some are relatively easy to imitate, but no one made me go into business manufacturing an undifferentiated core product (most core products in most mature markets are relatively undifferentiable anyway).

Chucklehead April 25, 2011 at 5:34 pm

Isn’t antitrust monopoly protection necessary in cases where government grants monopolies or controls properties like right of ways, spectrum, or exclusive franchises?

John Sullivan April 25, 2011 at 6:04 pm

All monoplies that reduce societal wealth are created by the government making competition illegal. All the government needs to do in those cases is to deregulate markets and allow competition to exist.

Pobrito April 25, 2011 at 8:09 pm

There is at least one type of predatory pricing that is not self destructive to the predator… companies that are back stopped by their home country and their home country tax payer and their home country consumers.

Japan was a good example. I worked for many years in the consumer electronics industry and attended many trade shows. In the 70s and 80s when the Japanese made their big push, the average Japanese who I met at these shows would often remark to me how inexpensive a particulary Sony (Canon, Hitachi, Panasonic, etc.) product was in the U.S. versus what they had to pay for the very same product in Japan. The found this to be simply amazing. Of course the Japanese executives knew how the game was rigged.

If that is not an artifact of predatory pricing, I do not know what is.

brotio April 26, 2011 at 1:03 am

It’s not an artifact of predatory pricing. It’s an artifact of the Japanese government hosing its own citizens with protectionist tariffs.

Pobrito April 26, 2011 at 8:46 am

Brotio:

Well that’s the other side of the same coin that keeps a predatory relationship in equilibrium.

We got cheap(er) products from the Japanese at the expense of devasting the targeted industries (and jobs in the US). Whereas the Japanese built their industries and created jobs at the cost of direct and indirect tax subsidies to those businesses and at the expense of higher costs and taxes to the average Japanese consumer.

vidyohs April 25, 2011 at 8:55 pm

Okay, being on a slightly different mental track than most folks, the question that came to my mind by the end of the first page of Don’s linked work was this: Wouldn’t Walmart be justified in counter charging those Drugstores (that sued Walmart) with collusion and price fixing? After all, were the prices they were charging really established through open market competition? Prove it. Strange in my mind that they were all so close in price and ripe to be undercut by Walmart.

(My apologies to Don, but I simply do not have the time to read Don’s piece in entirety, perhaps the answer I seek is one he answered.)

bishop robert April 26, 2011 at 3:11 am

Predatory pricing has certain drawbacks. If you are not the largest player in the market then the largest player may also predatory price to conserve their market share.
http://www.healthproductreviewers.com/lean-muscle-x-review.html

Stephen A. Boyko April 26, 2011 at 9:41 am

Three questions:

Is “predatory,” price discovery or price determined?

Why are the most regulated industries the most oligopolistic?

Does predatory pricing subsidize the very externalities that serve as future competition?

Brendan April 26, 2011 at 11:54 am

I think the only company to use predatory pricing successfully is the US Postal Service.

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