Predatory pricing : risks and market impact

Are you a business looking to implement a pricing strategy? At PricingHUB , we can help you increase your revenues by putting consumers at the heart of your price optimisation. What is a predatory pricing strategy? What are its advantages and disadvantages? We answer all these questions in detail.

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What is predatory pricing?

Predatory pricing is a selling price offered by a dominant company to consumers that is lower than production costs. The aim is to drive out the competition, but also to discourage the entry of potential new competitors. To do this, the company sells ‘at a loss’ to monopolize a market, and then raises its prices.

How do you set up predatory pricing?

If a company wishes to implement a predatory pricing strategy, it should analyse certain points beforehand:

Analyse the competition: predatory pricing can lead to a price war on the market. It is important to ensure that the competition does not have the opportunity to follow the same tactics for a long period, as sales at a loss could affect the company’s financial health.
In the same spirit, it is important to carry out a financial analysis to ensure that the company has the necessary cash flow to allow itself to sell at a loss.

Finally, a demand elasticity analysis would be necessary to assess the volume sold following the price cut and evaluate future losses.

Definite advantages for taking over a market

Predatory pricing can present certain benefits that make it an appealing strategy for market dominance, but it’s important to understand the full scope of its impact.

Naturally, every company wants to be in a dominant position in relation to its competitors. Although decried, this strategy has a number of advantages:

Eliminate the competition: by offering products at lower prices than its competitors, a brand automatically puts itself in a more advantageous position, as its prices are much more attractive to consumers. It will therefore attract consumers from its competitors and, if the competition is unable to adjust its prices to cope with this significant drop, it will gradually be squeezed out of the market.
Achieve a monopoly in a market: the company would thus be the sole supplier of its product or service.
Discourage new competitors from entering a market: the lower the prices in a market, the more competitive they are and the more difficult it is for new brands to enter.
Set new prices for the market: if it so wishes, this will enable the dominant company to set higher prices to the detriment of consumer choice. This would result in higher sales.

Legal risks and challenges of predatory pricing

Risks to be taken into account in this decision

Before engaging in predatory pricing, it is crucial to be aware of all the risks associated with this strategy.

Is predatory pricing legal? Insights into US and global regulations

Predatory pricing is illegal in many regions around the world. In the United States, the Sherman Antitrust Act prohibits pricing strategies that deliberately undermine competition. However, proving predatory intent can be challenging, as plaintiffs must show that a company priced below cost and intended to monopolize the market. Globally, regulations vary. In Europe, the Akzo case established a legal precedent that deems predatory pricing abusive and anti-competitive. Similarly, many countries have enacted laws to prevent such tactics, although enforcement and the burden of proof remain difficult.

A pricing strategy that is illegal in Europe

The main drawback of this practice is that it is normally prohibited by law. On 3 July 1991, the European Court of Justice ruled in the Akzo case that predatory pricing was abusive and anti-competitive. As a result, any company resorting to this strategy is liable to financial penalties. Indeed, a company infringes free competition in its market if it can be proved that it has set prices below the average prices in its market and that it sells its products at prices that are also below the cost of producing them.

However, it is sometimes difficult for competitors to prove these two points if the company implements a deliberate predatory strategy.

Consequences for businesses

Reputation damage and brand image concerns

Obviously, a lower-than-average price can be considered as a way of boosting profits, but it’s also important to bear in mind that if customers are used to a certain price for a product or service, seeing a much lower price appear for an equivalent product could be seen as a sign of poor quality or counterfeiting, tarnishing your company’s reputation and brand image. What’s more, its image can also be tarnished if the company has achieved monopoly status and then raises its prices excessively.

Financial risks and market sanctions

Engaging in predatory pricing carries significant financial risks. Companies that are found guilty of this practice may face heavy fines and penalties, particularly in regions with strict anti-competition laws. Additionally, these firms often suffer from market sanctions, such as restrictions on future pricing activities or bans on certain markets. The long-term financial consequences include the loss of investor confidence, decreased stock value, and reputational damage. Ultimately, while predatory pricing may offer short-term gains, the long-term financial fallout can severely harm a business.

Industries most affected by predatory pricing

Tech and e-commerce giants: key targets of accusations

Tech and e-commerce giants are often accused of using predatory pricing to maintain market dominance. Companies like Amazon have faced scrutiny for allegedly using aggressive pricing strategies to drive competitors out of business, only to raise prices once they’ve achieved dominance. These accusations are not new, but in recent years, governments and regulatory bodies have increasingly focused on holding large corporations accountable. The sheer scale and market influence of these giants make them prime targets for accusations of anti-competitive practices.

Vulnerabilities in the retail and manufacturing sectors

Retail and manufacturing sectors are particularly vulnerable to the effects of predatory pricing. Smaller businesses in these industries often lack the financial resources to survive extended periods of price wars initiated by larger competitors. When big players engage in predatory pricing, they can force smaller companies to either lower their prices unsustainably or exit the market entirely. In manufacturing, this leads to reduced competition, stifling innovation and driving up long-term costs for consumers once the market consolidates under a few dominant players.

Using pricing AI to achieve your commercial objectives

Finally, why implement a risky and illegal predatory pricing strategy when you can use artificial intelligence to find optimal pricing that will make it easier for you to achieve your objectives? PricingHUB’s algorithm enables you to define optimal prices to achieve the commercial objectives you have set. The AI analyses the market data supplied and carries out continuous price elasticity tests to offer you prices that are adapted to changes and events in your market.

Unleash the power of your pricing, contact our team of experts now to request a free demonstration.