Predatory Pricing: Definition, Example, and Why It’s Used

What is predatory pricing?

Predatory pricing is the strategy of setting prices unrealistically low—often below cost—with the purpose of driving competitors out of a market. If successful, the predator aims to eliminate rivals, secure monopoly power, and later raise prices to recoup losses. While low prices can benefit consumers in the short term, predatory pricing harms competition and consumer choice over the long run and is illegal under antitrust laws when intended to monopolize.

Key takeaways

• Predatory pricing involves intentionally low prices designed to eliminate competitors.
• It is illegal if the purpose and likely effect are to create or maintain monopoly power.
• Consumers benefit briefly from lower prices but may face higher prices and fewer choices later.
• Proving predatory pricing in court is difficult; plaintiffs must usually show below-cost pricing and a substantial probability of monopolization.

How predatory pricing works

• A firm lowers prices—sometimes below its manufacturing or average variable cost—to reduce rivals’ revenues and force them out.
• Competitors that cannot sustain losses exit the market.
• With reduced competition, the predator raises prices back to normal or above-normal levels to recover losses and increase profits.
• Entry barriers or scale advantages can make re-entry difficult, potentially leaving consumers with a de facto monopoly.

Effects on markets and workers

• Short term: Consumers enjoy lower prices, wider choice and greater bargaining power.
• Medium/long term: Reduced competition enables higher prices, fewer choices, and diminished innovation.
• Labor impact: A dominant firm facing less competition for workers may suppress wages and reduce employment options.

Why it’s hard to sustain

• Sustaining below-cost pricing requires substantial resources and exposes the predator to heavy losses while competitors or new entrants wait for the opportunity to re-enter once prices rise.
• Market conditions (many small rivals, low entry barriers) often enable competitors to survive or return after prices normalize.
• For these reasons, predatory pricing is risky and rarely succeeds unless complemented by factors that deter entry (patents, high capital requirements, exclusive contracts, control of distribution).

Dumping: predatory pricing in international trade

Dumping is selling goods in a foreign market at prices below domestic prices or below production cost to capture market share abroad. Governments treat dumping as a form of predatory pricing because it can harm local industries. Trade remedies—antidumping duties—may be imposed to offset the price advantage and restore fair competition.

Illustrative examples

• Historical case: Early 20th‑century bromine markets—when foreign firms attempted below-cost exports, an American firm bought the dumped product domestically and resold it abroad, disrupting the foreign cartel’s strategy.
• U.S. antitrust enforcement: Retailers such as Walmart have faced predatory pricing allegations alleging below-cost sales intended to drive local rivals out of business; courts have sometimes restrained specific below-cost sales.

Legal considerations

Proving predatory pricing typically requires demonstrating:
* Below-cost pricing: Prices below an appropriate measure of cost (often average variable cost).
* Anticompetitive intent and a dangerous probability of recoupment: That the predator is likely to succeed in eliminating competitors and later raise prices to recover losses.

Enforcement landscape:
* Competition authorities (e.g., FTC, DOJ) investigate claims, but courts set a high bar because aggressive pricing is also a normal competitive behavior that benefits consumers.
* In trade contexts, agencies use “less than fair value” tests and can impose antidumping duties to neutralize the advantage of dumped imports.

How to distinguish predatory pricing from competitive pricing

Look for:
* Pricing below a recognized cost measure (e.g., average variable cost).
* Evidence of intent to eliminate competition (internal documents, strategy).
* A credible ability to recoup losses after rivals exit (e.g., high barriers to entry, durable market power).

Conclusion

Predatory pricing is an anticompetitive tactic that can harm consumers and workers once a firm achieves dominant market power. Short-term price drops may appear beneficial, but when motivated by an intent to monopolize and paired with conditions that enable recoupment, they undermine competition and are unlawful. Because low prices are also a hallmark of healthy competition, antitrust enforcement focuses on rigorous proof of below-cost pricing and a likely probability of monopoly to distinguish illegal predation from legitimate competitive behavior.