The Myth of Predatory Pricing

By DiLorenzo, Thomas J. | USA TODAY, January 1993 | Go to article overview

The Myth of Predatory Pricing


DiLorenzo, Thomas J., USA TODAY


Any company attempting to monopolize a market by lowering its prices to such a low level that all competitors are driven out of business would be acting irrationally.

One of the oldest big business conspiracy theories--predatory pricing--was popularized in the late 19th century by journalists such as Ida Tarbell. In History of the Standard Oil Company, she excoriated John D. Rockefeller because its low prices had driven her brother's employer, the Pure Oil Company, from the petroleum-refining business. "Cutting to Kill" was the title of the chapter in which she condemned Standard Oil's allegedly predatory price cutting.

The predatory pricing argument is simple. The predatory firm first lowers its price until it is below the average cost of its competitors, who then must lower their prices below average cost, thereby losing money on each unit sold. If they fail to cut their prices, they will lose virtually all of their market share; if they do, they eventually will go bankrupt. After the competition has been forced out of the market, the predatory firm raises its price, compensating itself for the money it lost while engaged in predatory pricing, and earns monopoly profits forever after.

The theory of predatory pricing always has seemed to have a grain of truth to it--at least to non-economists--but research over the past 35 years has shown that, as a strategy for monopolizing an industry, it is irrational; that there never has been a single clear-cut example of a monopoly created by so-called predatory pricing; and that such claims typically are made by competitors who either are unwilling or unable to cut their own prices. Thus, legal restrictions on price cutting, in the name of combating "predation" inevitably are protectionist and anti-consumer.

Predatory pricing gets virtually no respect from economists, but remains a popular legal and political theory for several reasons. First, huge sums of money are involved in litigation, guaranteeing that the anti-trust bar always will be fond of the theory. During the 1970s, AT&T estimated that it spent more than $100,000,000 a year defending itself against claims of predatory pricing. It has been estimated that the average cost to a major corporation of litigating such a case is $30,000,000.

Second, because it seems plausible at first, the idea of predatory pricing lends itself to political demagoguery, especially when combined with xenophobia. The specter of a foreign conspiracy to take over American industries one by one is extremely popular in folk myth. Protectionist members of Congress frequently invoke that myth in attempts to protect businesses in their districts from foreign competition.

Third, ideological anti-business pressure organizations, such as Citizen Action, a self-styled consumer group, also employ the predatory pricing tale in their efforts to discredit capitalism and promote greater governmental control of industry. Citizen Action perennially attacks the oil industry for either raising or cutting prices. When oil and gas prices go up, it holds a press conference to denounce alleged price gouging. When they go down, it can be relied on to claim that the reductions are part of a grand conspiracy to rid the market of competitors. Even when prices remain constant, price-fixing conspiracies frequently are alleged.

Fourth, predatory pricing is a convenient weapon for businesses that do not want to match their competitors' price cutting. Filing an anti-trust lawsuit is a common alternative to competing by slashing prices, improving product quality, or both.

Finally, some economists still embrace the theory of predatory pricing. However, their support for the notion is based entirely on highly stylized "models," not on actual experience.

In 1958, economist John McGree examined the 1911 Standard Oil anti-trust decision that required John D. Rockefeller to divest his company. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Myth of Predatory Pricing
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.