Here’s an open letter to Cafe Hayek commenter Manuel Onate:
Thanks for your comment on my post about below-cost pricing . You write:
Selling goods or services below their cos is a time honored practice to expel from the market competitors which do not have the means to finance the short time losses that this practice causes. In fact, if the Chinese government is indeed financing losses caused by the dumping practices of some Chinese companies selling below their costs, that is a reprehensible practice.
With respect, the practice that is a time-honored means of gaining monopoly power is not the actual charging of prices below cost; it is, rather, accusing competitors of grasping for monopoly power by charging prices below cost, and using this accusation as an excuse to have the government forcibly raise the prices charged for competitors’ outputs.
So-called “predatory pricing” is akin to the Loch Ness monster. It’s much-mentioned and feared, yet history provides no real evidence of its existence. And for good reason: charging prices below cost is a lousy means of gaining monopoly power.
Economic theory makes clear that any such “predator” necessarily inflicts on itself losses greater than those that it inflicts on the rivals that it is trying to run from the market. Such self-imposed differentially high disadvantages pave no reliable road to monopoly power. Quite the opposite.
Of course, you accuse Beijing of subsidizing any such losses incurred by Chinese firms. But if the subsidized Chinese firms have no comparative advantage over their American rivals, Beijing winds up paying dearly to expand the market share of firms that cannot cover the costs of serving that market share. As soon as the subsidies stop, the Chinese firms will no longer survive in those expanded markets. What does China gain by such folly? Nothing. But it does lose.
In contrast, if the subsidized Chinese firms eventually gain a comparative advantage over their American rivals, so what? People and firms routinely invest in gaining comparative advantages that they currently don’t possess. Each of my students is enrolled in college for precisely this purpose. Similarly, when governments, say, fund schools of engineering, they do so to create within their jurisdictions comparative advantages that would otherwise not exist.
It’s a separate question whether or not, in any particular case, the benefits of achieving that ‘new’ comparative advantage are worth the costs incurred to do so. But there’s nothing unusual with efforts, private and governmental, to alter the pattern of comparative advantage. And if Beijing pays for Chinese producers to achieve comparative advantages that those producers would not otherwise have, we Americans are no worse off than we would be were those Chinese producers ‘naturally’ endowed with those comparative advantages.
Regardless, there is nothing at all “reprehensible” from Americans’ perspective about the Chinese government subsidizing our present consumption or arranging for Chinese producers to eventually become more efficient at producing goods and services that we wish to purchase.