Law and Economics of Predatory Pricing, The

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot


Bruce Kobayashi


in Antitrust Law and Economics, Keith N. Hylton, ed., Edward Elgar Publishing, 2010, pp. 116-156


This chapter analyzes the history and economic feasibility of predatory pricing and how it should be dealt with.

Policy Relevance

Rules that are easy to interpret and implement are necessary when attempting to prevent predatory pricing. Otherwise, procompetitive pricing may be unnecessarily prevented by accident.

Main Points

  • Predatory pricing is when a company sets prices on their product so low that they lose short term profits in an attempt to drive competitors out of the market.  In theory, the company can then recoup the lost profits by raising prices when the competitors have left.

  • Predatory pricing hurts the general market by reducing competition.  While consumers get the short term benefit of low prices they pay more in the long run.

  • Historically there has been some skepticism about feasible use of predatory pricing, and whether or not it can be implemented successfully.  More recent literature suggests that it can be implemented, and may exist in the marketplace.

  • This new understanding of predatory pricing has created some pressure for the creation of new regulation that would help prevent such pricing schemes.  However, the complexity of successfully implementing such structures may be prohibitive.

  • Any set of regulations targeted towards stricter control of pricing runs the risk of also preventing procompetitive pricing, which drives down the cost of consumer goods in the market.

  • Traditionally the courts have used a test that is solely suspicious of companies that are selling products below the cost to create them.  While this test does not prevent all forms of predatory pricing, it creates a clear, consistent, and easily enforceable rule that does not constrain procompetitive pricing.

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