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Taking a Loss Today in Hopes of Higher Profits in the Future
Posted By Don Boudreaux On April 21, 2011 @ 3:33 pm In Antitrust | Comments Disabled
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.
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