Here’s another thought on predatory pricing.
Predatory pricing is said to occur when a firm charges prices below its costs with the intent of bankrupting all current rivals and frightening away all future rivals. The firm’s ultimate goal is monopoly power, which it will use to raise prices, and thereby reap unusually high profits in the future.
All agree that the costs the predatory firm incurs today (by pricing below its costs) are an investment by the firm in securing future monopoly power. The firm will make this investment only if the investment’s expected, risk-adjusted rate of return is the highest the firm can get for the funds it will invest.
But what a poor investment predatory pricing would be.
Wouldn’t any firm that is willing to invest, say, $1 million today in the hope of obtaining tomorrow a more-secure market position invest this $1M in something other than a price war against rivals who can efficiently operate in the industry? Wouldn’t these funds be better invested to fund the creation of new products, on differentiating the firm’s existing products from those of its rivals, or on improving the firm’s operation efficiency? New-product creation, product differentiation, and efficiency enhancements are not as precisely, as quickly, or as surely matched by rivals as is a simple price cut. Any imbecile can match a price cut with 100% certainty; it takes real effort even to have the hope of matching a rival on the product-differentiation front, or at improving efficiencies of operation.
Competent firms desiring higher profits are unlikely ever to seek more-secure, less-exposed market positions through such a juvenile and uncreative means as predatory pricing.
