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And Making Predatory Pricing Even More Unlikely…

… is this point explained in an e-mail sent to me by Warren Smith (pasted below; the italicized words are quotations from my article). Mr. Smith is among the most astute and knowledgeable readers of this blog. Here he elaborates on my recent AIER column in which I explain some of the reasons why fears of so-called “predatory pricing” are unfounded.

In support of your position, I would also suggest that:

For a firm to drive its rivals out of business by charging “excessively” low prices, it must not only cut its prices but also expand its sales, implies that the firm must increase its production of goods and services, ie., it must commit to investing in plant, equipment and labor at an unprofitable level of sales revenue.

Once the predation is complete:

Yet this monopoly power is worthless to the predator unless the predator now raises prices above costs in order to reap monopoly profits. So the predator does so, implies that the new higher price levels will find a lower volume of overall sales, and correspondingly leave the expanded plant and equipment underutilized or entirely unused.

The capital markets would recognize the inevitability of this dilemma long before it occurred and would begin to starve the “predator” for the capital necessary to expand.

Finishing with your point that innovation alone can create cost-sustainable expansion with reduction in costs.


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