- Cafe Hayek - https://cafehayek.com -

The Unicorn of Predatory Pricing

Tweet [1]

A wonky letter to a correspondent:

Mr. O__:

Thanks for your e-mail.

You ask what I think of Christopher Leslie’s 2012 criticism [2] of John McGee’s famous 1958 paper [3] on predatory pricing. I read Leslie’s paper years ago but have little recollection of it, and unfortunately I don’t now have time to reread it carefully. For this I apologize.

But I’ve never regarded McGee’s arguments – as good as they are – against the notion of predatory pricing to be the most fundamental. The most foundational and effective arguments to expose predatory pricing as mythical are in Frank Easterbrook’s 1981 paper “Predatory Strategies and Counterstrategies [4].” Also important is Kenneth Elzinga’s and David Mills’s 1989 paper, “Testing for Predation: Is Recoupment Feasible? [5]

I add this: While there’s no doubting that every firm wishes to secure monopoly power, selling at prices below costs is a pathetically poor means of achieving this goal. Not only (as is widely recognized) does such a monopolizing ‘strategy’ result in losses for the predator that are larger than are the losses suffered by any of its rivals, nothing is easier for the predator’s rivals than simply to match that price cut. Matching a price cut can be expertly done by a kindergartner.

A competently run firm aiming to ruin its rivals would invest not in waging a price war but, instead, in improving its product or lowering its production costs (or both). Compared to the simple act of matching a price cut, matching a competitor’s improved product quality or enhanced efficiency in production is far more challenging. No aspiring monopolist with even a modicum of business acumen would waste its resources by pricing predatorily – which is why history offers no compelling evidence of successful monopolization achieved in the market through predatory pricing.

By the way, the fact that a decently trained undergraduate economics major can sketch a scenario in which predatory pricing might work as a means of monopolization is no more evidence of the reality of predatory pricing than is the fact that a competent artist can sketch a unicorn evidence of the reality of unicorns.

More of my thoughts on predatory pricing are here [6].

Sincerely,
Don