Pricing is a strategic tool that companies employ to strengthen their competitiveness. In some cases, though, it can become extreme and hurt competition. Are deep-discounts by online players examples of predatory pricing? Mint takes a look.
What is predatory pricing?
Predatory pricing is the act of a market leader lowering its prices below its costs to gain an unfair advantage. The predator incurs short-term losses to hurt other players and drive them out of the market. Later, with fewer competitors, the predator can raise prices to recoup losses. Such behaviour is considered anti-competitive and can be taken up by competition or industry regulators for review. Often, the difficulty arises in determining the appropriate cost to check whether prices were indeed predatory in nature and, punitive action, even when taken, might be too late to restore market competitiveness.
What is not predatory?
Predatory pricing should not be confused with normal, competitive price wars. For instance, a firm that reduces costs below that of its competitors could offer products with lower prices. Having achieved cost leadership, players such as Walmart, Southwest Airlines and D-Mart can consistently sell at low prices. Such prices, if matched by competitors, could cause them to incur losses and exit the market—but that can’t be considered predatory. Similarly, smaller or new players offering temporary, deep discounts would not be considered predatory since they may not have the effect of driving larger firms out of the market.
How do we recognize predatory pricing?
First, predatory pricing is done by a dominant player with high market share and deep pockets. Second, the price has to be lower than the predator’s costs. Third, the pricing should effectively drive others out of business. Fourth, the market’s entry barriers should be high enough to deter new entrants when the predator tries to recoup its losses.
Are e-tailers indulging in predatory pricing?
Leading online retailers are not dominant players in the overall retail sector, but with their global parents, they do have the financial muscle to sustain losses that others might not. In several cases, e-tailers have reportedly offered prices below variable cost, but that is now becoming difficult with regulations that govern the marketplaces. E-commerce has not led to the exit of traditional retailers. Finally, retail sector does not have large entry barriers, with the proliferation and frequent entry of niche or regional players.
What about the telecom industry?
The telecom sector has been disrupted by a new entrant. Therefore, it technically fails the test on the first condition. But it is clear that aggressive pricing was launched by a firm that could sustain significant short-term losses. A price of zero, even when couched as an introductory plan, is always below cost. The sector has seen the exit of smaller players and earlier market leaders seem to be on the verge of collapse. Finally, its entry barriers are quite high.
*Srinivasa Addepalli is the founder & CEO of ed-tech startup GlobalGyan.
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