Several Cafe Hayek readers have e-mailed me over the past few weeks to ask one version or another of this question: Are import tariffs justified in order to protect domestic producers from so-called “predatory pricing” by foreign rivals? “Predatory pricing” is said to occur whenever a seller, intent on monopolizing its market, charges for its outputs prices that are below this seller’s costs of producing and supplying its outputs. The alleged problem with predatory pricing is that it can bankrupt efficient rivals of the predator – that is, rivals who economically ‘belong’ in the industry but who are nevertheless driven out because the predator forced them to meet its below-cost prices for so long that these rivals had no choice but to leave the industry. Once all rivals of the predator leave the industry, the predator has a monopoly and will then raise its prices to monopoly levels. Consumers will eventually be harmed.
A tariff today – one designed to countervail the artificially low prices of imports in the domestic market – protects consumers tomorrow from being victimized by monopolists. Or, at any rate, that’s the theory.
The concern raised by the above possibility is understandable. This concern is also economically more justifiable than is the typical concern of protectionists. The justification for tariffs aimed at stopping predatory pricing in the domestic market by foreign firms is that, while such tariffs do protect domestic producers, their ultimate purpose is to maximize the welfare of consumers rather than that of producers.
Yet predatory pricing – or “dumping” as it is called in the international context* – is so highly unlikely to occur in reality that it can be safely ignored. I explained why at various times throughout the years here at Cafe Hayek. (Search, in the search bar to the right, “predatory pricing.” I apologize that many of the links are now dead. I’ll do my best, in the coming weeks, to resurrect them.) In the meantime, I post below what I wrote on this topic this past November. I add here only that it is a perilous scheme to artificially create monopoly power today as a means of preventing monopoly power tomorrow.
There are many reasons to ignore allegations that private firms use so-called “predatory pricing” today as a means of monopolizing markets tomorrow – not the least of which is that there is no credible historical evidence of any such scheme ever actually being used to achieve genuine monopoly power for an alleged practitioner. (By “genuine monopoly power” I mean the power of a firm to make consumers worse off than consumers were before the alleged predatory-pricing scheme resulted in the alleged monopoly power.)
If the firm has privileged access to government funds, the analysis of predation differs from the analysis when the firm has no such access.
Sometimes allegations of the “dumping” of imports are couched as allegations of predatory pricing by foreign firms that are subsidized by foreign governments – that is, by foreign firms that have privileged access to government funds. Even with such subsidies, however, there are many reasons to doubt that such below-cost pricing (if below-cost pricing it truly be) poses such a danger to consumers of those subsidized-firms’ exports as to justify government retaliation in the home market against these imports that are allegedly priced too low. Here is one such reason for doubt that I don’t recall ever seeing mentioned (although it’s quite likely that such a mention has been made and I am simply unaware of it): To the extent that the goal of governments that subsidize their countries’ exporters is not to maximize those companies’ profits over the long run but, rather, to increase as much as possible their countries’ exports, any successful monopolization of foreign markets would likely not result in the successful, subsidized exporting firms reducing their exports from pre-monopoly levels. That is, such successful monopolization would not result in the standard reduction in output that is predicted when markets become truly monopolized.
Given the distressing refusal of nearly all governments worldwide to abandon their commitment to mercantilist policies – that is, given governments’ unquenchable mercantilist thirst to increase as much as possible the amounts that their people produce for consumption by foreigners, and to decrease as much as possible the amounts that their people receive from foreigners in return – it’s politically unrealistic to suppose that the goal of foreign government’s that subsidize their countries’ exports is to achieve monopoly power in the subsidized industries. Moreover, even if such subsidies happen to result in monopoly power for such subsidized firms, it’s unrealistic to believe that the subsidizing governments would not then take steps to encourage the monopolist exporters under their jurisdiction to continue to artificially increase the amounts that they export. That is, even if foreign subsidization of exporters happened to result in those exporters enjoying genuine monopoly power in their respective industries, it’s unlikely that consumers of those exports would suffer as much as they would suffer were that monopoly power not the result of mercantilist policies.
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* The term “dumping” includes, but is broader than, predatory pricing. Dumping is often said to occur when a firm charges in foreign markets prices that are lower than those that it charges in its home market. That is, unlike so-called “predatory pricing,” so-called “dumping” is not confined to allegations of pricing below cost with the intent of monopolizing the market.
