Predatory Pricing

[ku]

I know this may not be the most exciting subject for many of you, but what do you think of predatory pricing? Do you support the view by the CATO Institute that predatory pricing is a myth (or a "conspiracy theory against big business," as they put it). Or it it real? How should it be dealt with?

[ed84c]

No it isnt a myth, take supermarkets, they can afford to loose money on some items because it will be regained on the others, therefore putting other buisneses out of buisness.

 

As with most of these, voting via the foot, is a good method, and farmers markets do seem to becoming more popular, which is good

[Pangloss]

One of the more interesting ways to look at issues like this is to look at the ability of competition to arise in a monopolistic market. It always comes down to whether you believe that a high market can be easily maintained, or not. Opinions on this vary, but over the course of US history I think we've seen it go both ways -- monopolies or high-market-share position lost due to poor management, not just government-enduced change.

 

So it kinda boils down to whether you agree with this statement:

 

It takes extraordinary skill to hold more than fifty percent of a large industry's market in a free economy. It requires unusual productive ability, unfailing business judgment, unrelenting effort at the continuous improvement of one's product and technique. The rare company which is able to retain its share of the market year after year and decade after decade does so by means of productive efficiency -- and deserves praise, not condemnation.

 

Those are the words of Alan Greenspan in 1961 ("Antitrust", from Ayn Rand's "Capitalism, the Unknown Ideal").

 

One of the main contentions of libertarians and objectivists is that the existence of regulation has created a system which, by regulating monopolies, actually protects them. An obvious example would be Major League Baseball's exemption, but even a case like Microsoft enjoys support from a regulated market.

 

How? Because of hair-splitting legal decisions in its favor, and because of careful definition of what's allowed and not allowed. For example, if you have a government regulation that says you are not allowed to sell X widgets on Y days, then you'd better believe that a company will make every effort to sell X widgets on Y+1 days, or X+1 (slightly modified) widgets on Y days. Business is like that -- it's not just Microsoft. If it's legal, it's legal. Someone's going to do it.

 

And so libertarians and objectivists say that we should have just kept our noses out of it altogether. The problem with that arises, of course, from compassion, and trying to decide where to draw the line in the most eggregious cases of employee abuse.

 

Just to give an example of where I think a line can be drawn (and I don't think predatory pricing is such a point), I think it's legitimate to have workplace safety regulations. Yes, one might argue that if a workplace is dangerous then the employee should seek employment elsewhere. The problem lies in the employee's ability to detect whether or not safety is an issue. Technology has grown way beyond "common sense". A nuclear power plant worker may go his entire career not knowing that he's going to die ten minutes after he retires. But the power plant operator might know it full well.

[ku]

What do you think may be an argument against this point by DiLorenzo: “…the theory of predatory pricing assumes the prior existence of a ‘war chest of monopoly profits’ that the predator can use to subsidize its practice of pricing below average cost. But how does that war chest come into being if the firm has not yet become a monopoly?”

 

From http://www.cato.org/pubs/pas/pa-169.html