Predatory Pricing

Predatory pricing is a pricing strategy employed by companies in global markets with the intention of driving competitors out of the market or preventing new entrants from establishing themselves. It involves setting prices at an artificially low level, often below cost price, in order to gain a competitive advantage and increase market share.

The primary objective of predatory pricing is to create barriers to entry for competitors by making it financially unsustainable for them to operate in the market. By undercutting competitors’ prices, predatory pricing can force them to lower their prices as well, which may lead to financial losses or even bankruptcy for those unable to sustain the low prices in the long term.

In the following article we discuss the usefulness of a predatory pricing policy. We shed light on why artificially low prices can make sense in the short term. Furthermore, we discuss the effects of such a massive pricing policy in terms of innovation and legal consequences.

Predatory pricing advantages and disadvantages

Predatory pricing offers several advantages to companies using this strategy. First, they can gain a larger market share by attracting customers through lower prices. This larger market share can lead to economies of scale, lower production costs and higher profitability in the long run. In addition, predatory pricing can deter potential competitors from entering the market, as they perceive the barriers to entry created by the predatory pricing strategy.

However, predatory pricing also has disadvantages, both for the companies that apply it and for their competitors. One of the main disadvantages is short-term financial losses. Setting prices below production costs can reduce profits and strain financial resources. Moreover, if competitors survive the initial price-cutting phase, they can counter with price cuts, leading to a price war that can harm all market participants.

Another reason why predictive pricing should be chosen wisely is innovation. Accessible markets thrive on mutual competition. Here, for example, there is the German quote: “Competition stimulates business.” However, if there are too few market participants in a sub-sector, the power of innovation dwindles. The danger of an oligopoly arises.

Furthermore, permanently low prices reduce the budget for research and product innovation. In short: in principle, a predictive pricing strategy can be applied in the short term. In the long term, however, it often works against market expansion.

Reasons for predatory pricing

Companies can resort to predatory pricing for a variety of reasons, especially in short-term phases. A common reason is to overcome sales crises or to boost demand in times of economic downturn. The market entry of new products and services is also often accompanied by discount campaigns and special conditions. Companies want to use lower prices to attract customers who tend to be more price-sensitive and cautious in difficult economic times. Unknown products can also be better placed in the market with this tactic.

Another reason for predatory pricing is to revive a stagnant market or to stimulate demand. By pricing aggressively below competitors, companies can generate interest and increase sales volume, which in turn can lead to greater market share and future profitability.

Inventory difficulties can also tempt companies to predatory pricing. If a company wants to part with excess inventory or perishable goods, a price cut may make sense. The goal is then to avoid losses related to inventory write-offs.

Predatory pricing as a long-term strategy?

While predatory pricing can provide short-term advantages, it is often debated whether it can be a sustainable long-term strategy for market penetration and development. The effectiveness of predatory pricing in the long term depends on various factors, such as the industry structure, the potential for retaliation from competitors, and the ability of the predator to recoup losses after eliminating competition.

In some cases, predatory pricing can indeed lead to long-term market dominance. By driving out competitors and establishing a dominant position, the predatory firm can later raise prices and enjoy higher profitability. However, this outcome is not guaranteed and depends on the absence of new competitors entering the market and the ability to maintain a competitive advantage even after raising prices. Additionally, legal and regulatory frameworks in different countries may restrict or penalize predatory pricing practices, further limiting its long-term viability.

Is predatory pricing illegal?

The legality of predatory pricing is regulated differently in different jurisdictions around the world. In many countries predatory pricing is considered anti-competitive behaviour and is prohibited under antitrust or competition laws. These laws are designed to ensure fair competition and prevent dominant companies from abusing their market power to eliminate competition.

To determine whether predatory pricing is illegal, the authorities usually examine whether the predatory company has the ability and intention to recover the losses incurred during the predatory phase. If there is evidence that a predatory company intends to establish a monopoly or significantly harm competition in the long run, legal action can be taken against the company.

Companies must be careful when implementing pricing strategies so as not to run afoul of antitrust regulations in the respective target market. It is essential to seek legal advice and to know the specific laws and regulations that govern pricing in the respective markets.

As we mentioned earlier, predatory pricing is a short-term strategy to gain market share and sales. But in the long run, a careful, long-term pricing policy is more effective. This is because it also looks at supply chains, purchase prices and consumer behavior and quality requirements by customers. A sustainable business strategy also looks at these factors instead of focusing on short-term success.

How NIQ provides support for the right pricing and pricing strategy

As a leading market research company, NIQ supports companies in determining the right pricing and pricing strategy. Thanks to decades of data analysis, we provide comprehensive market data and insights for a wide range of industries. This foundation enables companies to make informed decisions about their pricing policies and expand market share.

By using NIQ’s current market trends and data, companies can assess the competitive landscape, identify pricing opportunities and understand customer preferences and behaviour. NIQ’s market research service provides companies with an in-depth understanding of their target markets, including customer segmentation, price sensitivity and demand patterns. By analysing market dynamics, consumer trends and competitive forces, NIQ can help companies develop effective pricing strategies that balance profitability and competitiveness.

Conclusion

Predatory pricing is a pricing strategy used by companies to gain a short-term competitive advantage. While it offers benefits such as increased market share and potential long-term dominance, it also carries risks such as short-term financial losses and potential retaliation from competitors. Apart from this, the borderline of cartelization is problematic.

The legality of predatory pricing varies from country to country, with many countries considering it to be against antitrust law.

As a market research company, NIQ can provide valuable support in determining the right pricing and pricing strategy. By using NIQ’s market data and insights, companies can make informed decisions, adapt to market trends and maintain their competitive position in the long term. Here, we focus on the development of long-term pricing policies as opposed to short-term predictive pricing strategies.