Predatory pricing – unfair or just smart business?
September 2nd, 2008Fair business practices 5 CommentsThis article focuses on predatory pricing, the use of aggressive pricing strategies in an attempt to eliminate competitors.
Specifically, this article examines two questions – whether or not the practice is ethical and whether or not it should be allowed.
What is predatory pricing?
As stated above, “predatory pricing” refers to the practice of large business using aggressive pricing strategies in order to eliminate smaller competitors.
The practice involves price cutting for a short period of time to the extent that profit margins become unsustainable. Often, under this strategy, products or services are sold at below cost.
Large business, with strong balance sheets, can sustain the associated losses for a considerable time period, particularly where losses involved can be subsidized by profits from other product lines. Smaller competitors cannot.
The result – smaller competitors are forced out of business whilst the surviving companies face a less competitive operating environment.
Is predatory pricing unethical?
Provided it is done within legal limitations, predatory pricing is not unethical.
Business is a fierce and competitive environment, and where companies have strong balance sheets, they are entitled to use this as a competitive weapon.
Ethical behavior is important, but business is a hard ball game and industry players need not show kindness toward competitors.
If you can’t stand the heat, better stay out of the kitchen.
Should it be allowed?
Not in my view. In many countries, predatory pricing is not allowed, and rightly so.
Whilst not unethical, the practice is harmful to the economy in at least three ways:
• It can destroy otherwise viable firms.
• It discourages the entry of otherwise viable firms into the market.
• It can lead to a concentration of power within industries and the creation of monopolies or oligopolies. In the resultant less competitive environment, firms are under less pressure to innovate or improve product quality and customer service.
Accordingly, whilst not unethical in itself, economic considerations dictate that predatory pricing should not be allowed.
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