Predatory pricing refers to a pricing strategy where a company sets prices below its costs in an effort to eliminate competitors from the market. It is a tactic used by dominant firms to stifle competition.
- Prices are kept very low in the short-term to make it difficult for competitors to compete
- Goal is to drive rivals out of business by pricing them below cost of production
- Once competitors exit, prices are raised exponentially to recoup losses
It is considered an anti-competitive behavior under antitrust laws since it harms competition. Competitors cannot remain in the market by matching below-cost prices and are forced to exit.
Challenges include determining whether prices are truly below costs after accounting for factors like overhead. Regulators investigate complaints of predatory pricing for signs of predatory intent and recoupment potential.
Overall, predatory pricing involves deliberate short-term losses to achieve improper long-term gains at the expense of fair competition.