Predatory Pricing (1)

8/2/2019 Predatory Pricing (1)

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PREDATORY PRICINGGroup: 2Section: B

Ayan Chatterjee (2011050)Debabrata Kar (2011061)Esheeta Ghosh (2011071)Harendra Kumar (2011084)Kallol Sarkar (2011096)


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Predatory pricing is generally defined as sales below cost bya dominant firm over a long enough period of time for thepurpose of driving a competitor from the market.

After eliminating the competitors from the market, the

predator firm then raises prices to supra competitive levelsto recoup its losses and render the practice profitable.

A company trying enter the market or that segment sells the

product at a lower price in order to attract the customers butthis kind of technique not termed as Predatory Pricing

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Predatory pricing is different from normal pricing cut

why?

As predatory pricing is done by a dominant firm foreliminating the competition.

In case of normal price reduction the firms tries to

increase their market share by slashing the prices of

their product.

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The predatory pricing under the Act means the

sale of goods or provision of services, at a price

which is below the cost, as may be determined by

regulations, of production of goods or provision ofservices, with a view to reduce competition or

eliminate the competitors

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Traditional theory:

The predation stage

The post-predation stage

Modern Theory:

The predatory firm has access to some information that other

firms dont have which it uses to drive the firms out or to deternew entrants in the market.

Financial Market predation

Reputation predation

Cost signalling model

Demand signaling

Test market Predation

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Predatory pricing is defined in Economicterms as a price reduction that is profitableonly because of added power the predator

gains from eliminating, disciplining orotherwise inhibiting the competitive conductof a rival or potential rival.

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PORTERS FIVE FORCES FRAMEWORK


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The framework assumes a perfect and static marketstructure which is rare

It does not focus on strategic alliances between companiesand other forms of collaboration

It does not focus on the complementing products


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Dominance : Since large capital reserves are needed to sustain the losses during the below cost selling period, hence only a

dominant firm would be able to practice predatory pricing.

Barriers to entry and re-entry : Successful predatory pricing requires certain level of entry barriers to the market.

Otherwise other potential rivals would immediately re-enter the market once the predator raises its prices and by adding their

output to that of the predator drive the prices back to competitive level

. Excess Capacity : Excess capacity is a pre-requisite for predatory pricing. The predator must be able to absorb all the new

demand created by its price cuts, and in the case of predation against existing rivals, the predator must be able to absorb the

rivals sales.

Non-price Predation: excessive product differentiation, predatory advertisement and investment, predatory product

innovation

Others : Examining market share trends during the period of predation is important for recoupment analysis. Low price

elasticity of demand facilitates recoupment as demand will decline relatively less when the firm raises the market price. If a

predator enjoys greater brand royalty, the less costly a predatory pricing shall be for the firm.


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VARIOUS COSTS UNDER

COMPETITION LAW


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Its the actual cost of production including items

Cost of material consumed

Direct wages and salaries

Direct expenses

Work overheads

Quality control costs

R&D cost

Packaging

Finance and Administration cost


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Total Fixed Cost- those which do not change with output over a giventime period.

Total Variable Cost- Its the difference between total Cost and total

fixed cost, and share of fixed overheads in any during the said period.

Total Avoidable Cost- The total cost that could have been avoided if the

enterprise had not produced the quantity of extra output during the

referred period.

Average Avoidable Cost- The total avoidable cost divided by the total

output considered for estimating total avoidable cost.


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Long-run Average Incremental Cost- The increment tolong run average cost on account of an additional unit ofproduct, where long run cost includes both capital andoperating costs.

Market Value- The consideration which the customer paysor agrees to pay for a product which is sold or provided orcan be sold or provided, as the case may be.

Marginal Cost- it is the change in the total cost that ariseswhen the quantity produces changes by one unit.


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Areeda and Turner suggested that pricing below short runmarginal cost is economically inefficient.

If a firm is found to set price below short run marginal cost, thenit reflects predatory intent.

Use of AVC as a proxy for SRMC.

Any price between ATC and AVC is allowed.

But if price between AC and AVC its predatory.


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Alternate to the Areeda-Turner rule on average total cost.

Price below ATC is predatory, only if accompanied by

substantial evidence of predatory intent.

A firm makes loss if price is below ATC, but it is still profit

maximizing by continuing production so long price is above

the AVC.


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Paul Joskow & Alvin Klevorick

Ist Stage:- Examines the market structure

IInd Stage:- Examines the cost based or pricing behavior

test


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Assumes that predatory pricing is happening

Evaluates both the predator firm as well as its targets.

Compares if predator company would be able to cover its

losses it sustained during the attack.


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Whether a firm intended to engage in predatory pricing?

Direct Evidence:- Documents proving predatory intent.

Indirect Evidence:- Continuous targeting the competitors

price cut, frequency of price cuts.


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Incumbent firm cuts down its prices in case of new entry.

For the new entry it becomes tough to sustain and it quickly

exits

Incumbent firms raises its price to original level.

Does not only forces the competition to exit but also deters

any future intent.


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AKZO v COMMISSION [1991]

TETRA PAK INTERNATIONAL SA v COMMISSION

DEUTSCH POST AG [2001]

BROOKE GROUP LTD. v. BROWN & WILLIAMSON

TOBACCO CORP

MATSUSHITA V. ZENITH RADIO CORP.


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Very perplexing and quite puzzling.

Ambiguity between predatory pricing and other desirable

forms of price cutting.

The antitrust laws should adequately curb the predatory

pricing without overly deterring competitive price cutting.


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Thank You

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