Predatory Pricing: Any Price That's Better Than Mine
from the it-used-to-be-called-competitive-pricing dept
Amidst the endless discussion about Google Checkout, some are trotting out predatory pricing accusations because the company is willing to take a loss on each transaction in order to drive advertising sales. But does this qualify as predatory, or is this the standard definition of a loss leader? Is the iTunes music store predatory because it runs at a loss with the goal of fueling iPod sales? Are Linux distros predatory because they offer free software in hopes of collecting service revenue later on? What about news sites giving free access so they can sell ads? Unfortunately, there’s no good definition of predatory pricing, or a bright line separating it from normal competitive pricing. There’s nothing intrinsically nefarious about wanting to price the competition out of business. What people are concerned about is the hypothetical case in which a company drives the competition out of business, and then raises prices dramatically. But this is rare, and assumes that new entrants couldn’t then enter the space. As in the case of similar complaints against Microsoft, the solution is to compete aggressively with the predator by out innovating, which is how monopolists are eventually brought down.
Comments on “Predatory Pricing: Any Price That's Better Than Mine”
Not as easy as it sounds...
As in the case of similar complaints against Microsoft, the solution is to compete aggressively with the predator by out innovating, which is how monopolists are eventually brought down.
Competition doesnt get much more aggressive than intentionally taking a loss on your product in hopes that your comptetition will go broke before you.
And bear in mind that monopolists are not trying to reshape the very laws that at least gave the competition a leg to stand on.
Re: Not as easy as it sounds...
ID10T, sure, I can start up a linux company, run it at a loss, but microsfot having much much much bigger pockets than I, can take a loss for far greater a time period. Nevermind the little facts like I don’t have a multibillion dollar advertizing budget, even though I have a far superior product, that I am giving away for free, I can’t force companies like Dell, HP, Acer, Sony to pre-load my software on it…. Sure, compete with a monopoly that has billions of dollars. In what fantastic liberal non-reality based universe?
Being a loss leader is not the same as predator pricing. If you price it low to sell other products, thus increasing revenues, then thats fine. If you price it, take a loss, offer no other products to gain additional revenue, and are doing so to hurt a competitor, thats predatory pricing.
There can be no such thing as a “predatory” price. Each exchange that takes place is a voluntary agreement between the two parties. There is nothing predatory about it.
A third party, who is not even involved in the exchange, has no right to stick his nose in other people’s business by calling the terms of their deal “predatory.”
Re: Well said!
The third party (the victim business) certainly has a right to complain and try and make the consumer realize that he is participating in a scam which cannot rationally benefit the economy in the long run (using an irrelevant hoard of cash to crush through normal pricing forces) and which he may very well personally regret when the competition vanishes and the barriers to entry for competing products are raised significantly.
Re: Well said!
I would like to add that this is just basic game theory situation. Everyone is better off eventually if everyone cooperates. But any individual is often better off by trying to game the system and run off with the spoils. If its not a matter of law or ethics, then at least it is a manner of honour. Just because a practice is composed of completely free trade does not mean that it is honourable. Please do not pay lip service to the market while picking its pocket.
Re: You're missing the point
Predatory pricing is about firms setting prices that are below the market equilibrium in order to drive other firms out of business. A firm changing its price doesn’t effect the market equilibrium, therefore predatory pricing IS possible. The argument you ought to be making is that there’s nothing wrong with predatory pricing.
Re: Well said!
very funny… love it!!!
Paypal can do it too.
Ebay isn’t exactly pocketless, they could be making paypal just as cheap to the user. Why is google getting the robber barron title?
Make it dirt cheap to move more stuff on ebay, and make more sites accept paypal. They can’t just complain “Google is doing something we arn’t willing to do! we are expected to cut profits to promote our position? It’s not fair!”
Stop whining and play the game, you are not the little guy either.
Not that rare
“hypothetical case in which a company drives the competition out of business, and then raises prices dramatically. But this is rare”
That type of business is not that rare. In a way that’s what ebay did with paypal. They bought paypal and kept the prices low while there was competition. Once there was no more competition, Ebay significantly raised the price. The only difference is that ebay bought most of paypal’s competitors, rather than driving them out of business.
Another example of this is Walmart. They will move into a small town, and have a bunch of “opening” sales that will last a few months. A few months is all it takes to put most of your small shops out of business. Once that is done, Walmart “ends” the sales and returns their prices to normal. The only thing they don’t do, is jack the prices up to higher than normal levels.
It was a good article until you just had to take a jab at Microsoft. It’s getting tired jackasses. Anywho, it seems MS is falling on the other side of the fence in at least one part of this. With the outstanding quality and low low price tag on One Care Live, Symantec is already sueing and I’m sure McAffee isn’t far behind. I might even drop Nod32 for it.
Re: So close.
It was a good article until you just had to take a jab at Microsoft. It’s getting tired jackasses.
Um. What “jab” at Microsoft?
RE PRedatory Pricing
On example of predatory pricing is when one large discounter lowered its prices on preccription drugs with the intent of driving out all the small pharmacies. In Federal Court their own documents showed their intent to eliminate the competition and then raise prices (I think it was 100%). That was about ten years ago. If not for their internal documents, nothing could have been proven.
Predatory pricing, like price fixing, eventually harms the consumers. Examples are ealily found in the Wall Street Jounal archives.
There is nothing really that uncommon about it at all. Most companies with a large capital are willing to take heavy losses to gain market share as long as they know the barrier to entry is somewhat difficult. I would too if I owned one.
But, what most of us are forgetting is that Google is also a WEB SEARCH engine and portal and by increasing its visibility and advertisementby so called predatory pricing does introduce an even more difficult and higher barrier to entry for new e-bay or paypal type sites. (since most sites marketing is heavily dependent on search engines).
This can be observed as a somewhat anti-trust type behavior. Just like microsoft throwing IE for free in their OS in which killed Netscape. Keep in mind, I did not disagree with Microsoft, if you are a programmer, you too will realize the wonders that they have done for integrating the browser within the OS should you use html embedded COM objects.
Anyways, in the end, good does come out of all of this for you the consumer. Google will always have competitors as the search engine business is different from on OS. (The products and results of a search engine comply and follow an international standard (arguably, we all know how well CSS performs on differing browsers (joke btw) ) verses an OS is strictly guided by its API even though the language might be a standard.
If it’s that easy, why isn’t there a viable alternative to Windows? I mean a completely functional OS that does 99% of what Windows does?
It’s not easy going up against the big gorilla when predatory pricing is practiced. MS is one of the biggest offenders.
RE: to Dam
There is Dam, it’s called Linux.
May not be intirely ethical but it’s smart business. We live in a capitalist society so if you want to get ahead and have the money to do so, go for it. I’m tired of hearing people complain about microsoft, hey they’re smart for doing what they did, if I were in they’re position I would have done the same thing and most of you would have to
“Unfortunately, there’s no good definition of predatory pricing, or a bright line separating it from normal competitive pricing”
Here is your definition here:
Predatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market, or create a barrier to entry into the market for potential new competitors. The other firms must lower their prices in order to compete with the predatory pricer, which causes them to lose money, eventually driving them from the market. The predatory pricer then has fewer competitors or even a monopoly, allowing it to raise prices above what the market would otherwise bear.
The examples you give of alleged predatory pricing are lame at best. I think you need to take an econ 101 course before you wrie or speak about predatory pricing.
One more definition
“or is this the standard definition of a loss leader?”
No, it is not:
In marketing, a loss leader is an item that is sold below cost in an effort to stimulate other profitable sales. It is a kind of sales promotion. There are several varieties of this profitable technique.
Unethical v. Illegal
First of all, predatory pricing (or whatever you want to call it) is not, by nature illegal. Ethical? Hardly, IMO.
When you use phrases like “intrinsically nefarious,” you are treading into the ethics arena. Ethics, however, are subjective on an individual level. While it may well be your opinion that what Google is doing is ethical, it certainly is not mine.
You would make a much better point if you stick with the legality of it. (BTW, has there been any legal action taken? I haven’t seen.)
Re: Unethical v. Illegal
I do agree with the point that ethics are subjective. I’d also add that pricing is a much more complex game than just setting your price lower than the competition. Predatory pricing is a theory, not a fact. It just sounds ominous and evil, but there is no substansive evidence of predatory pricing working and running all competition out of business. Most of the arguments here are based on the assumption that the market place in question is a zero-sum game. It is not. A loss leader that empties his huge pockets to try to run competitors out and create barriers to entry (yes, this is the definition) is guaranteed nothing even if he does get his competition to close up shop. There are still physical assets and human resources left. New competition can step in. Innovators can fill the void or bridge the pricing gap. In short, not a zero-sum game.
missing the bigger issue
Predatory pricing my ass. MS is simply making up for the fact that they didn’t bother to include anti-virus and firewall software in their OS. A functional OS (and one that will keep on functioning) must have these. Most consumers don’t have a clue and don’t know that they NEED to buy/install this software. Every single PC I have ever seen brought in for repair has had some virus or malware on it. Why? Because the end user has NO CLUE that they need to protect themselves from these things. They assume that the OS they purchased will just work. The only way something can “just work” is if it has good protection from the things that cause it to stop working.
Symantec and the like have taken advantage of the fact that MS didn’t see this coming. Well, now they know better and if MS does it right, there will be no reason for someone operating a Windows system to use a Symantec product. So Symatec cries “predatory pricing!”
Let's give this some time
Should we not let this product’s launch settle into orbit, giving us time to evaluate its merits before we demonize Google for vaguely unethical behavior? Let’s let the market fight this one out for a good while.
Preditory pricing, hardly… it is capitalistic relations between consenting adults.
Innovation is what drives the market. Microsoft and Google will need to continue to innovate or someday they will be replaced, just as the buggywhip and ice block manufacturers were by the automobile and refrigerator.
walmart’s been doing this for ages and they get away with it.
Sometimes a company will sell at a loss to increase loyalty. You may lose money on a sale to a new customer that will lead to more sales to the same customer down the road that will be profitable.