Taking a Loss Today in Hopes of Higher Profits in the Future

by Don Boudreaux on April 21, 2011

in Antitrust

Acme Inc. decides today to spend $10 million to make its product more attractive to consumers.

In Acme’s wildest dreams, all of its rivals will immediately go bankrupt and no future rivals will ever arise to challenge Acme, consumers’ attraction to Acme being made so intense by this $10M expenditure.  Acme will settle for an increase in consumer demand for its product sufficient at least to allow Acme to recoup its expenditure of $10M – but it, of course, hopes for some result closer to its wildest dreams: a substantial increase in consumer demand that results in a very handsome return on its investment of $10M.

Fast forward five and a half years, to January 1, 2017.

Turns out that consumer demand for Acme’s product did indeed increase as a result of Acme’s earlier expenditure of $10M, and that this 2011 expenditure proved to be a profitable investment.  Acme’s crack accountants reckon that the $10M expenditure caused Acme’s revenues to be higher (than they would have been without the investment of $10M) in…

2011 by $760,000

2012 by $3.8M

2013 by $4.0M

2014 by $6.2M

2015 by $800,000

2016 by $240,000

No further revenue-expanding effects of the 2011 $10M expenditure are expected.  And (rather amazingly!) there’s been no inflation during these five-plus years.

Acme’s execs look back on New Year’s Day, 2017, and congratulate themselves on making a wise investment of $10M back in April 2011.  Not a spectacular investment, by any means, but one that yielded a real rate of return, at the end of the (five-and-a-half-year) day of around, very roughly, 10 percent.

Some of the increased consumer demand that generated these higher-than-otherwise revenues for Acme came from consumers lured away from Acme’s rivals.  A few of those rivals even went bankrupt, arguably as a result of Acme’s 2011 investment of $10M.  Some of the increased demand came from luring new consumers into the market that Acme has long served.


Is Acme guilty of predation?  In 2011 Acme intentionally took an immediate loss of $10M in an attempt to gain larger market share.  It did not expect to recoup that $10M expense for several years – an expectation that proved to be correct.

“No,” you reply, “Acme isn’t guilty of predation because Acme had no real aim of monopolizing the market.”

Well, suppose that Acme had instead spent $10 billion to make its product more attractive to consumers – and it worked spectacularly well.  Acme’s product became off-the-charts superior to any and all rival products.  Consumers voluntarily chose to buy only Acme’s product.  All of Acme’s rivals went bankrupt within a few years.

Is Acme, in this latter scenario, a predator?


Nearly every expenditure that producers make, big and small, is an expense that is not immediately recouped by higher revenues.  And every expenditure is meant to generate higher profits in the future.  And nearly every expenditure in competitive markets is meant to harm rivals, in the sense that nearly every expenditure is aimed at making the investing-firm’s product offerings more attractive to consumers relative to the offerings of other firms.

There’s no way even in theory to identify a certain set of expenditures that enable a firm to offer better deals to consumers as “predatory” and other expenditures as “non-predatory.”  So when a firm sells a product at a price “below cost” (as cost is naively reckoned in standard econ and antitrust textbook treatments of production theory), that firm is making an investment today in hopes of earning higher profits in the future.

Why should this investment be treated with any more suspicion than we treat Acme’s $10M investment?

Oh, I almost forgot to specify just what that $10M was for.  Acme spent that $10M to repave its stores’ parking lots.

Be Sociable, Share!



45 comments    Share Share    Print    Email


Downsize DC April 21, 2011 at 3:42 pm

Obviously, any business expense is a form of greed!

Steve S April 21, 2011 at 3:57 pm

Hmmm…funny how politicians will go after a business for doing what has been described above, but give themselves a free pass from doing the same.

Are they not trying to increase their “market share” (electability) by spending money (ours) now in hopes of future gains? Every $10 million art project in Chicago is signed off in the hopes that maybe 100-1,000 people will now vote for him. And he is effectively driving his opponents (non-incumbents) out of business because they cannot spend at the same pace.


Jeff Neal April 21, 2011 at 5:01 pm

Not that you don’t realize it, but the obnoxious part of your sample/anedote is that it’s YOUR money. He’s using YOUR money to elect himself to office so he can spend more of YOUR money.


vidyohs April 21, 2011 at 5:19 pm

LOL Jeff, it is indeed a revelation of understanding, the day one realizes that when one spends a dollar agitating against the run-amok corrupt government, that government can spend five dollars of your money to suppress your message.

Kinda hard for us’ns to compete, eh?

Everyday Anarchist April 21, 2011 at 6:29 pm

On the other hand, this means the government is dependent on us for survival…

vidyohs April 21, 2011 at 7:46 pm

Oh absolutely. Government depends absolutely on our permission and our money.

vikingvista April 21, 2011 at 8:25 pm

Where would the master be without his slaves?

tomharvey April 21, 2011 at 4:13 pm

Argghhhh! Now I have to add “Predatory Paving” right after “Predatory Innovation” on the list of things I previously wasn’t worried about!

Frank33328 April 21, 2011 at 4:36 pm

By this logic, isn’t almost every individual also guilty of predatory-practices?

Every University educated person initially took a huge loss on education in hopes that the investment would provide an advantage over other people in the future job market. Every person that worked to develop a trade (plumber, etc.) took an initial loss in hopes of gaining a skill would give them an advantage over future competitors. Every person that donates either time or money is taking an initial loss; their benefit might be non-monetary but it is still true that the competition (those that would have sold the items or services that the donator gave away for free) lost business as a result.

Ken April 21, 2011 at 4:49 pm


“By this logic, isn’t almost every individual also guilty of predatory-practices?”

Yes. That’s the point.


Don Boudreaux April 21, 2011 at 4:52 pm


Frank33328 April 21, 2011 at 4:56 pm

This is a rough site…….

Frank33328 April 21, 2011 at 5:02 pm

Earlier this week I found out there is no such thing as an externality.

Today I find out there is no such than as predation.

This trend is destroying what impress-the-ladies topics…….

Ken April 21, 2011 at 8:45 pm


Where did you learn there is no such thing as an externality? Possibly you’re referring to this post?


Which of course doesn’t say that externalities don’t exist. It says quite clearly that “[n]o externality poses as great a threat to human health, happiness, and prosperity as does the negative externality of having obnoxiously uninformed and misguided people of the sort featured in this short video exercising a say (mainly through politics) in how the rest of us live our lives. ”

And what you learned today is that there is no such thing as price predation, not predation. Plenty of agents use predation. Check out the unions and the Obama administration keeping Boeing from opening up a new production line in South Carolina. That is what is called political entrepreneurship, rather that market entrepreneur.

Market entrepreneurs make people’s lives better by offering a quality product at a decent, some might say a predatory price. Political entrepreneurs don’t like to be shown up by market entrepreneurship and are unwilling to provide people with something they want, so use political connections to shut down operations that create jobs and products.


Dan April 21, 2011 at 8:48 pm

Indeed! I am inclined to believe the ‘roughness’ is from the dealings with ‘trolls’, as opposed to having arrogance and no patience for the less economically inclined. Experience has withered away some of their patience. I hope I am wrong.

Ken April 21, 2011 at 9:12 pm

Dan (and Frank),

I wasn’t being rough. I answered simply and in a straight forward manner to maintain clarity. What is rough about saying “Yes. That’s the point.”?


Frank33328 April 21, 2011 at 9:25 pm

The “rough site” comment was suppose to be tongue-in-cheek. Everyone take a deep breathe.

Frank33328 April 21, 2011 at 9:31 pm

or a deep breath. (damn spell check!)

Jeff Neal April 21, 2011 at 4:45 pm

Not to be picky – and not to argue the point – but you’re looking at gross dollars. I assume you meant that the NET was increased by the amounts listed for each year, otherwise we don’t really know if the new pavement really paid off for Acme, do we?

Now, of course, you could be assuming that the widgets Acme sells have a marginal cost of $0, but that assumption should have been disclosed.

And, to beat the horse – the annual Internal Rate of Return I calculate for Acme’s investment is approximately 15.8%, so you must be deducting 580 bps based on the assumption that their lawyers/lobbyists took a cut.

Enjoyed the exercise.

Don Boudreaux April 21, 2011 at 4:51 pm

Thanks. Yes. Net revenues. On the 10 percent figure; I initially had the investment pay-off period last 6.5 (rather than 5.5) years. I changed it (for reasons too dull to recount), but forgot to alter the rate of return.

Jeff Neal April 21, 2011 at 4:57 pm

Glad to contribute some humor and clarity – and hope it was helpful

Martin Brock April 21, 2011 at 4:49 pm

There’s no way even in theory to identify a certain set of expenditures that enable a firm to offer better deals to consumers as “predatory” and other expenditures as “non-predatory.”

Here’s a theory.

Suppose my firm invests in the campaigns of politicians promising to impose rents that raise my competitors’ costs more than mine. This investment allows me to offer better deals to consumers, compared to the consumers’ other options.

Slappy McFee April 21, 2011 at 5:05 pm

Or better yet, they float the idea of a “public option”…….

tomharvey April 21, 2011 at 5:30 pm

Martin, your cheating is almost Landsburg-esque! Get your theorizing back inside the box.

Slappy McFee April 21, 2011 at 5:03 pm

CNN just posted an article about the Justice Department looking into gas price gouging. Prices too low = predatory, prices to high = collusion. God bless America.

Phil April 21, 2011 at 6:36 pm

Well, I think the problem is that how you understand (i.e. define) the word predatory. I’m just thinking of my industrial organization course where there were good exmples of models where the incumbent used its market position in a manner that was not optimal from social point of view. I have to dig up an example later. But you are right that by nature markets are predatory, so predatory does not always lead to unwanted behavior.

Daniel Kuehn April 22, 2011 at 5:25 am

Sheesh – perhaps decades ago they should have just called it “strategic”.

Am I dense, or is “predatory behavior” simply the word that IO came up with to describe behavior where firms:

1. Do not maximize profit in the current period.
2. Make decisions specifically with an eye to inducing exit rather than just maximizing profits.

I’ve always understood “predation” to be a specific sort of strategy, not something “wrong” that firms have done (despite what the courts may think).

In other words, the person above who said that almost everyone is predatory is wrong. “Predatory” specifically deals with someone with inducing exit, not just any investment for later benefit. Lots of firms make investments that will pay off later. It’s only labeled “predatory” by economists if the firm specifically aimed at inducing exit. Not all firms do that.

I think you’re being very sensitive about the adjective that was chosen.

Don Boudreaux April 22, 2011 at 7:33 am

And how, even in theory, do you distinguish investments made “to induce exit” from those not made to do so?

I, for one, would never invest in a firm whose managers sincerely insisted that they have no desire to induce the exit of rivals.

Daniel Kuehn April 22, 2011 at 8:18 am

There are lots of reasons to make investments. You can demonstrate that the explicit goal of inducing exit provides one reason. I’m not sure anyone claims you can parse that out from
other motivations, but that doesn’t mean you can’t theoretically demonstrate the strategic value of this particular case. Why do you feel the need to distinguish it? Don’t you think multiple strategic motivations go into investment decisions?

You think investing to differentiate your product from others is a good strategic investment to make?

Do you get frustrated that people model product differentiation as a specific strategy without specifying all the other motivations and providing a strategy for distinguishing each of them?

Don Boudreaux April 22, 2011 at 8:31 am

I get frustrated that economists take their models too literally and, as a result, mistakenly imagine that they (the economists) – by slapping the word “strategic” or “predatory” on some investments and not on others – have helpfully contributed to an understanding of reality.

ALL investments are strategic or predatory, in the sense that ALL investments are meant to increase a firms’ success in the market – which, from each investing-firm’s perspective, is success that will be at the expense of other firms.

Yes, some investments are more bold and are bigger than others; some are more likely than others to unleash a gale of creative destruction rather than a breeze of creative adjustment. But if you believe that there’s some theoretically determinable line that distinguishes market investments that ‘should’ be permitted from investments that ‘should not’ be permitted – that distinguishes investments that are ex ante likely to lead to net consumer harm from investments that are ex ante likely to lead to net consumer benefit – then you haven’t thought seriously enough about these matters.

Daniel Kuehn April 22, 2011 at 8:39 am

In that sense, yes, they are all strategic and predatory. But that is not the sense in which those words are used.

Of course firms want to be successful. The idea that there might be specific strategies and that it might be worth sketching them out doesn’t seem all that controversial to me. Take my human capital investment below. I invest in my human capital because (1.) I enjoy it, (2.) it improves my marginal productivity, and (3.) it is a signaling device. I don’t see what’s so frustrating about the idea that someone might be interested in thinking about each motivation in greater detail.

Don Boudreaux April 22, 2011 at 8:50 am

Daniel: the issue is whether or not the real world is sufficiently likely to be cursed with private market investments that, by destroying competition, harm consumers. There is absolutely NO historical or empirical evidence that it is. The only reason economists and Antitrust Police THINK that there is such a likelihood is because they’ve misconstrued and misused economic models to convince themselves that it must be so.

BTW, I haven’t the slightest idea why you insist that I’m “frustrated” by the fact that, while investment decisions typically have multiple instrumental motives, scholars often isolate and analyze one or the other of these motives. It doesn’t frustrate me at all. What DOES frustrate me is the historically uninformed belief – and theoretically naive conclusion – that a “strategic” or “predatory” motive can be singled out in ways that are relevant for policy-making.

Daniel Kuehn April 22, 2011 at 8:22 am

What about credit rationing a la Shapiro and Stiglitz… it’s not the only strategy that gets considered in banking, but it is one they highlighted. Do you get frustrated that they identified that one strategic justification for making certain investments?

What about the bootleggers and baptist literature? That highlights one strategic investment that “bootleggers” make but doesn’t highlight all the other motivations that go into investments in their industry. Do you get frustrated that that single strategy is modeled in some papers, but others are neglected?

Daniel Kuehn April 22, 2011 at 8:25 am

Or the signaling literature for education which I know some of your colleagues like. Most people that buy into that literature only suggest that signalling is an important reason for investing in education – I think very few would suggest it’s the only reason. Does that literature bother you because it highligths one specific human capital investment strategy and doesn’t really spend all that much time in distinguishing it from others?

Don Boudreaux April 22, 2011 at 8:32 am

You miss my point – which is precisely that it is impossible to distinguish different motives that power investment decisions.

Daniel Kuehn April 22, 2011 at 8:40 am

I noted that point in my first response and I agreed with you on that point (although I’m sure some empirical evidence could be suggestive – you’re never going to know this conclusively).

Why is that a source of frustration for you though?

Biomed Tim April 22, 2011 at 8:59 am

Are you suggesting there is “predatory” education vs. “strategic” education?

Daniel Kuehn April 22, 2011 at 9:28 am

I’m not sure what predatory education would consist of. What are you getting at?

Don Boudreaux April 22, 2011 at 9:41 am

Ummm, Daniel….. I think that Biomed Tim is being facetious.

Ken April 22, 2011 at 6:30 pm


Predatory education: the act of educating yourself to such a level that you can outwit your opponent/competition most if not all the time resulting in greater success for you and less success for your opponent/competition including exiting whatever competition in which they were involved.


geoih April 22, 2011 at 7:41 am

Quote from Daniel Kuehn: ““Predatory” specifically deals with someone with inducing exit, not just any investment for later benefit.”

How do you tell the difference? “Later benefit” is almost always to the detriment of the competition, with the ultimate detriment being the elimination of the competition. What competitor would not prefer to eliminate the competition?

I think you’re trying to make a distinction that doesn’t exist (outside of your mind).

Don Boudreaux April 22, 2011 at 8:05 am

Correct, geoih. And to make the indistinguishable seemingly distinguishable, economists hit upon the notion that pricing below marginal cost with the intent to monopolize is “predatory.”

Antitrust scholars, rightly troubled by the practical difficulty of actually measuring marginal cost in real-world instances, settled upon pricing below average variable cost with the intent to monopolize as ‘close enough’ to being good evidence of predatory behavior that should be the object of the Antitrust Police. (These antitrust scholars simply, and mistakenly, took economists’ at their word that marginal cost has an unambiguous meaning in theory – a fact that is more than passing odd given mainstream-economists’ persistence in distinguishing “long-run marginal cost” from “short-run marginal cost.” Nonsense if nonsense ever there was.) These antitrust scholars – led by Phil Areeda and Donald Turner – inexplicably were not very troubled by the practical difficulty of actually measuring average variable cost in real-world instances.

Or troubled even by the theoretical difficulties – I point yet again to Armen Alchian’s 1959 paper “Costs and Outputs” – in determining which expenditures should be divided by which outputs to determine average variable cost. Are expenditures made today to cover pricing below average variable cost themselves part of the costs that ought to be included in the numerator into which the volume of output is divided? The Antitrust Police and their gullible – or corrupt (there IS a lot of money to be made in antitrust consulting) – economist-witnesses have no good answer to this question. Just as they have no good answer to this question (nor to many other relevant questions).

Naive textbook models of production and cost – using only Jacob Viner’s 1930s cost-curves and definitions – give insufficiently philosophical economists the mistaken impression that the world is vastly simpler than it really is. So these economists think that because in their models they see no good reason for pricing below marginal (or, practically, average variable) cost, any firm that does so must have predatory intent.

Dallas Weaver April 22, 2011 at 12:29 pm

The statement: “There’s no way even in theory to identify a certain set of expenditures that enable a firm to offer better deals to consumers as “predatory” and other expenditures as “non-predatory.” may not be true.

The concept of better deals is also relative and if the 10M$ was used to buy political influence to change the regulations (like limo services in Nashville) to make your “deal” a better deal relative to now non-existent competitors, these actions are predatory. Predation is possible when you have a third parties thumb on the scale.

With the government thumb being so large, a predatory K street investment is often very profitable.

Ken April 22, 2011 at 4:14 pm

Ayup. Oppenheimer, anyone?

Bob at Equity Trades April 23, 2011 at 4:13 am

The telecom industry was my home for many years. Whenever going to meet with the FCC (Federal Communications Commission), I was instructed by the lawyers to never mention competition as a reason for doing something. All actions were supposed to spring from a desire to bring benefits to the public. It never occurred to the Washington mandarins that bringing greater benefits would result in competitive gains, and, in theory, to the eventual extinction of competition.If one company provides superior products at a lower price, then most consumers would eventually choose them.

FCC dogma also held that numerous companies in an industry were also signs of healthy competition. Not, as is the case, that numerous companies are a sign of an industry in its infancy, before competition and consolidation have put cost savings in consumers’ hands. Such is virtue when seen through the eyes of the State.

The issue can be extended to international relations. Should a government act solely for the benefit of its people, or should it take the “enlightened” view that national interest must sometimes be sacrificed for harmony in the international “community”? Is international competition unfair? Many believe the latter. In fact, government policy has been inflationary, often making foreign assets more attractive to US investors than domestic products. See Equity Trades

Previous post:

Next post: