What is Predatory Pricing?
Predatory pricing can be defined as a pricing strategy where the prices of goods and the services are fixed at such low level that it becomes almost impossible for the other firms to compete in the existing market and are thus forced to go out of the race.
Explanation
This is a pricing strategy wherewith the deliberate efforts; an organization uses its advantages in order to sabotage the market along with damaging its competitor’s position. According to this strategy, prices of the goods or services are kept at the lower range where other firms find it difficult to match the price and survive in the market. So, this act drives away existing and potential rival contenders and created a sort of the situation of the monopoly in the market.
Characteristics
- In this pricing strategy, prices are set to a very low level with the aim of eliminating competition.
- It leads to the creation of a monopoly in the industry.
- It is beneficial for customers in the short term but in the long term, they have to face a problem because of the price rise.
How Does it Work?
- In the case of this, one organization reduces the prices of its products to a very low level with the main aim of eliminating the competition from the market and restricting the new entrants thereby gaining the monopoly.
- Now, when the organization will decrease the prices, it will attract the current as well as potential customers and the other companies will be forced to reduce their prices.
- The organization will continue reducing the prices and the other companies then will have to close their business due to their inability to survive at such low prices. This will remove all the competitors, restrict the new entrants and creates the situation of monopoly in the market.
Examples of Predatory Pricing
There are several retail stores in the town selling various products to the person living in the local community. Suddenly one departmental store was opened by the renowned ABC departmental chain store setting the price of all the products at a level which is lower than that of the retail stores. Customers started going to the ABC department store as they were getting the same products at a lower price and thus the entire retail store started losing their customers. Initially, retail stores lowered their prices due to significant price pressure and for matching with the price of the competitor to regain their customers but eventually, they all closed their stores as they were not able to survive in the current situation. With this closure of the retail stores, the situation of the monopoly created in the market and then taking advantage of the created situation, ABC increased the prices of the product.
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Impact of Predatory Pricing
#1 – Effects in Short Run
- From the perspective of the customer, this is beneficial in the short term because they will be able to get the goods or services at a very low price which they might not be able to get in the normal situations.
- From the perspective of all of the companies in the industry, this is harmful as they have to reduce their prices of the product in order to compete, which creates a situation where they find it difficult to survive. And few companies, which survives have to bear a huge amount of losses because of one organization’s predatory pricing strategy
#2 – Effects in Long Run
From the perspective of the customer, it is beneficial in the long term as well but it is the customers only who have to face the after-effects of this. This is so because once the organization adopting this pricing strategy is successful in its plan of eliminating the competition from the market; it would eventually raise the prices of products to a great extent according to its choice and then the customers have to buy at that price only because of non-availability of the alternative products.
Predatory Pricing vs Limit Pricing
- Predatory pricing is charging price below the average cost making a loss in the short-run and with the help of this forcing rival firms out from the industry.
- Whereas, Limit pricing is reducing prices to above just the average costs in order to make sure that if any of the new entrants come into Industry then it would have to suffer a loss.
Advantages
- With this strategy, the firms adopting the same gain a position of dominant nature in the market.
- This creates a barrier for the entry of the new entrants as in such hard conditions or scenario, the new entrants would find it difficult to survive and grow their business.
- When there is the predatory pricing in the market by any firm, then it gets the advantage of the elimination of the competition. This is so because, with the pricing strategy, rival companies who are not able to bear the loss will have to shut down its business and thereby eliminating the competition.
Disadvantages
- In many of the countries, setting off predatory pricing is not allowed and it is considered as an illegal act.
- It is possible to maintain this pricing strategy only in the short term and the same is not feasible and becomes almost impossible to maintain in the long run of the business.
Conclusion
Predatory Pricing is the strategy where the organization reduces the price of the products in order to eliminate the competition from the industry. This leads to the creation of the situation of monopoly in the market. This is beneficial to the customers in the short run and long term as well but it is the customers only who have to face the after-effects of the same.
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