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A classic Silicon Valley tactic – losing money to crush rivals – under scrutiny
- api 5y agoIn raw materials and manufacturing this is called "dumping" and is often illegal because it can have absolutely disastrous effects on supply chains. A well financed competitor can sell something below cost, crush all its competition, and then raise prices to whatever it pleases.
- disgruntledphd2 5y agoYeah, it feels like this should be illegal when done to expand into new markets by a profitable business. Framing the law would be tricky though, as one doesn't want to criminalise high-growth (read: VC-funded) startups.
- liotier 5y agoHow are VC-funded startups different from "expand into new markets by a profitable business" ?
- Grimm1 5y agoBecause a startup isn't profitable often for years even while in growth before it hits the inflection point. Taking this ability away without being careful means you'll likely further entrench incumbents at the expense of those new companies.
- ahtihn 5y agoI think marginal unit costs should not be allowed to be higher than the sale price in general, with maybe some exception (liquidation of existing stock with no further production or explicit temporary promotions). For example a company like Uber should not be allowed to sell rides for less than what they pay the driver for the ride.
- disgruntledphd2 5y agoI agree with you in principle, but framing the law would be tricky.
- Leherenn 5y agoI think it is the case in some European countries like France.
- mountainb 5y agoIt's not. VC is often a cut out for institutional investors who are also major shareholders in BigTech or are literally BigTech itself. These kinds of laws are fundamentally political in nature, as there is no real 'neutral' ground.
- deedub 5y agoDoesn't Walmart do something similar when they open a store in a new area?
- gruez 5y agoI thought walmart just had lower prices, period, rather than having lower prices when they enter and then jacking them up.
- jonathankoren 5y agoWalmart was repeatedly found guilty of predatory pricing, along with entering consent decrees to forbid predatory pricing throughout the 1990s. Arkansas https://www.washingtonpost.com/archive/business/1993/10/13/wal-mart-loses-suit-over-pricing/98fef031-51aa-4371-8c09-9f8f2e083309/ https://www.washingtonpost.com/archive/business/1993/10/13/w... Wisconsin https://ilsr.org/walmart-settles-predatory-pricing-charge/ https://ilsr.org/walmart-settles-predatory-pricing-charge/
- JohnWhigham 5y agoWalmart is the original modern big company to do exactly this. And now they're now seen as the "good guy" when compared to Amazon. Ain't life funny?
- moftz 5y agoYou don't necessarily have to engage in predatory pricing if you can sell in such volume that you can get better prices than a mom and pop as well as offering a one stop shop for most consumers. You don't even need to raise prices once the competition is gone simply because you are already making a decent profit.
- jbay808 5y agoJust to expand on this, it's the sort of thing that sounds like it shouldn't work, because the competition can just wait you out and raise prices down the road too. But it can, because relative advantage is stateful and path-dependent. If you lay off skilled workers, cancel contracts, close factories, lose customer mindshare, and so on, that damage can be very hard to reverse even when favourable conditions eventually reappear.
- cjcole 5y agoWhat allows this tactic to work is the size asymmetry between very large companies and smaller companies. It is much less effective against similarly sized companies. Very large companies have much more buffer (reserves of capital, talent, etc.) to draw from. The very large company can absorb layoffs, cancelations, closures, and mindshare losses longer than a much smaller and very likely leaner company can. Defining what does and does not constitute predatory behavior is difficult to define clearly and concisely. One potential mitigation, given the above, would be to routinely break up companies above a certain size. To make it perfectly typical, ordinary, and automatic to do so. To shift the burden of proof from the government needing to establish monopoly status to the giant company needing to demonstrate that the consumer benefits due to economies of scale derived from its size outweigh the negative externalities due to its size and subsequent disproportionate power and influence. Economies of scale leading to lower consumer prices are a positive good. The negative externalities of huge companies due to their size and outsized power and influence aren't given as much consideration as they are less quantifiable, but they are real and should be taken into account.
- moftz 5y agoForcing companies to break up can have the unintentional effect of creating cartels where the previously joined companies of similar size work together to push out smaller companies with price fixing. If there is only so much business to be done and there's no realistic way for you to cover a majority of the industry, you can make more money pushing out any of the competition that won't keep prices fixed.
- BeFlatXIII 5y ago
- pitaj 5y agoDo you have any contemporary examples of this happening? Seems like something that would be really easy to take advantage of by buying the material sold cheap and selling it later at a profit.
- shagie 5y agoThere are numerous allegations from different countries claiming that another country is dumping some product on the market. The one I can find most recently is: https://www.bloomberg.com/news/articles/2021-06-24/china-sues-australia-over-some-anti-dumping-measures-at-wto-kqaky8bq https://www.bloomberg.com/news/articles/2021-06-24/china-sue... > China filed a lawsuit at the World Trade Organization over Australian anti-dumping and anti-subsidy measures on Chinese exports of railway wheels, wind towers and stainless steel sinks, the Ministry of Commerce said Thursday in Beijing. This would be the third recent WTO case between the two countries, after Australia sued over Chinese tariffs on wine and barley. Prior to that (three weeks ago), it was China dumping steel alleged by Japan.
- aardvarkr 5y agoHere’s one - China flooded the global market with cheap solar panels that undercut everyone else in an effort funded by the govt. It made building massive solar projects cheaper but it decimated the domestic solar production around the globe because they couldn’t compete.
- rmah 5y agoExcept... that's just the first part. Where's the second part where they "do whatever they want" (I assume this meant raise prices)? Even after winning, they haven't done this. Why?
- dmwallin 5y agoThe goals of a nation-state are not the same as those of a corporation. Having a monopoly on a strategically important industry is valuable in and of itself, especially when viewed from a geopolitical perspective. Just look at what's currently going on in semiconductors.
- MattGaiser 5y ago> and then raise prices to whatever it pleases. I know that there is lots of theory on this, but has any company really ever gotten to this point?
- sofixa 5y agoDepends a bit on your definitions, but Google did it with Photos.
- reaperducer 5y agoIn the tech space, or outside? Trade wars between nations happen all the time because of dumping. Timber, aluminum, soybeans, and all kinds of other commodities. Tech companies have largely gotten a pass on normal business practices and codes of conduct this century because they're shiny and new. But as the industry ages, it will have to learn to work within the boundaries or ordinary civilization.
- cezary 5y agoGoogle Maps started charging developers once it was the dominant digital map, the fees killed MapFrappe: http://mapfrappe.com/ http://mapfrappe.com/
- NovemberWhiskey 5y agoWe should be careful with definitions here. Dumping, in the context of international trade, is very specifically a price discrimination rather than just an absolute price concept: it's where you export for cheaper than you sell domestically.
- mc32 5y agoBut it's also not just exchange rate. Other things come into consideration like local cost difference, PPP and so on. You can't expect a coke to cost the same (relative to USD) in the US as in Azerbaijan for example.
- nly 5y agoWhy would a company with 90% market share crush it's own profit margins to drive a 10% competitor out of the market? They'd be losing $9 for every $1 they took from the little guy.
- djohnston 5y agoSeems like the sort of scrutiny that would produce a well-intentioned law that will end up propping incumbents. Excited to be proven wrong though.
- pydry 5y agoThere's already a law against predatory pricing. It just has a high burden of proof, isn't enforced, and the FTC's own website expresses skepticism that such a thing could ever really happen: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/predatory-or-below-cost https://www.ftc.gov/tips-advice/competition-guidance/guide-a...
- vlovich123 5y agoThat’s frustrating. https://www.bloomberg.com/news/articles/2020-07-29/amazon-emails-show-effort-to-weaken-diapers-com-before-buying-it https://www.bloomberg.com/news/articles/2020-07-29/amazon-em...
- minikites 5y agoWhat is your solution? Should we just keep doing nothing?
- beiller 5y agoThat could work. Market forces will play it out, investors will get burned and be more hesitant to pour more gasoline on the fire. The business model as it stands appears to not work long term (maybe). What company has had long term success with this model (operate at massive losses until no competition left)? But short term the investors have been dumping their money directly into consumers' pockets via cheap uber rides or uber eats subsidized by VC so whats not to love?
- jonfw 5y agoAmazon, Uber, and Tesla have done pretty well by a similar model. They went a long time and spent a LOT of money before they turned reliable profits
- justbored123 5y agoInteresting, from the wiki: Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce its prices of a product or service to loss-making levels in the short-term. The aim is that existing or potential competitors within the industry will be forced to leave the market. https://en.wikipedia.org/wiki/Predatory_pricing https://en.wikipedia.org/wiki/Predatory_pricing
- mc32 5y agoI think that is classic Standard Oil. It seems start-ups are different. When they do this they are not dominant. They are up and coming and attempting to leverage scale before competitors come and take their lunch (Uber, AB&B). At some point they cross the threshold and do become the dominant player, however, often not yet profitably. So the question is how to gauge that so as not to kill innovation but also to ensure other competitors aren't drowned.
- lostcolony 5y agoSure, but better laws to prevent it prevent everyone from doing it. Debt financing to expand is one thing; debt financing to expand when you currently aren't making a profit, and you don't have a business model to make a profit after expansion except "choke out competitors so you have a monopoly and can raise prices to profitable levels" is anti-consumer.
- dantheman 5y agoIf you look at the Standard Oil case it doesn't make much sense - they lowered costs dramatically, greatly improved the world, and by the time they were broken up had already lost a huge amount of market share and were trending down. What exactly was the benefit that happened after the break up?
- theptip 5y agoImportant to distinguish two types of loss-leader; this is a strategy that non-dominant companies in competitive markets use too, and all startups are in a sense running a loss leader until they get to break-even. A loss-leader is not necessarily anticompetitive. It’s when you combine it with a dominant market position that the problems emerge. My understanding is that EU antitrust law is more concerned with preserving competition as a benefit in itself for the consumer, whereas the US doesn’t think lack of competition in itself harms consumers, and requires you to show evidence of other harms before enforcing antitrust laws. The case of predatory pricing is a good example of where the US model tends to fail, and it seems like we are currently re-examining this regulatory philosophy.
- barrkel 5y agoThis is one of SV's main competitive advantages vs not just the rest of the US, but the rest of the world: the amount of available financial capital to pour into scaling up quickly, which of course happens at a loss - sales generally lag costs and especially fixed costs. If you include human capital, it's almost all of SV's competitive advantage: co-location of the people and the money to scale up.
- lostcolony 5y agoDebt to scale up is one thing; operating for years operating/selling at a loss leading to ever increasing debt to choke out competitors and maintain a monopoly, fueling it with the expectation of a market valuation that will offset those losses, itself fueled by choking out those competitors, and all reliant on either getting out before it comes crashing down, or jacking up prices to profitable levels once there are no competitors left, is something else.
- dantheman 5y agoI question if that actually happens. Most companies don't actually have that large a moat.
- lostcolony 5y agoLong term it probably doesn't very often. That's cold comfort for the businesses that perhaps had better utility and better profit models, but couldn't compete because they couldn't debt finance as well. Likewise it's cold comfort for the consumer during the period when the company is able to jack up prices. And it's cold comfort for the retail investor who loses money should the company go under because it was unsustainable but had grown such market share it was included in index funds and things. It's not necessarily a permanent thing; little related to industry is. But the seemingly permanent cases are telling (Walmart being a great example). But even the impermanent ones; 20 years, say, of suboptimal outcomes for everyone except the already rich (the VCs), and the founders playing a flawed system well, is a reason to re-examine the system. Fundamentally being able to continually debt finance something that has no profitability, and possibly no path to profitability, or which leverages market inequalities to expand (again, Walmart; profits from one area enable predatory pricing in another to choke out competition, then you can raise prices, and repeat the cycle elsewhere), breaks a lot of the assumptions a 'free market' rests on. Or more succinctly, the practice is what enables digging the moat. The size of the moat is entirely controlled by how much financing you can get. We're seeing a lot of companies focusing on building moats rather than competing fairly.
- gentleman11 5y agoBefore sv did it, Walmart was famous for operating at a loss for years to kill local competitors who tried to spring up
- throwawayboise 5y agoMy own observations of this are that it only works in smaller areas where there isn't enough critical mass to support a lot of choice in markets. Where I live, we have WalMart, Target, other national "big box" retailers, three different supermarket chains, and a pretty wide variety of locally-owned small specialty retailers. Could a town of 10,000 support this kind of diversity in retail? No. So there, WalMart wins. Before WalMaret, there was more local retail, but they were barely making a living.
- darkwizard42 5y agoThis is the playbook that works for ridesharing as well (which seems to be an oft-cited example of this)... in a larger city the density of riders and drivers is sufficiently high the market is able to support a 2-company system. In smaller markets, it quickly tilts into one of companies because no driver will stay on a platform without demand (long wait times for a ride), and no rider will use a platform without sufficient supply (high ETAs).
- deregulateMed 5y agoI wonder if mom and pop shops were not as economical. I study consumer prices and I've found mom and pop shops are significantly more expensive than the big chains. I'm talking like 2x more expensive. This is in suburbia where there are lots of competition.
- Ericson2314 5y agoI think both are true. Anti-trust is a funny thing because one hand it is clearly needed for power dynamics, but on the other hand orthodox econ with its increasing price curves underestimates how many sorts of monopolies are in fact "natural". Put another way, anti-trust looks very different if one doesn't believe competition is a stable outcome in the long term. In the specific Walmart/Amazon case, I would like to see a nationalized warehouse network run by the postal service. Warehousing-distribution of goods is just "content-addressed post".
- deleted 5y ago[deleted]
- throwawaycuriou 5y agoRelated charting and analysis of this going awry: https://wolfstreet.com/2021/07/05/todays-unicorns-have-bigger-cumulative-losses-than-amazon-had-lost-money-far-longer-than-amazon-still-dont-show-a-turnaround/ https://wolfstreet.com/2021/07/05/todays-unicorns-have-bigge... Did we learn the wrong lesson from Amazon?
- exabrial 5y agoIt's nothing more than borrowing a tactic from Standard Oil Company and Rockefeller. While markets generally don't respond healthily to regulations, it really ought to be illegal to offer goods/services for less than cost amortized over a certain period (maybe two years?). This would prevent a lot of monopoly formation, but probably have some unfortunate consequences for investment in markets that have slower yields.
- bordercases 5y agoIt would have a negative impact on the pricing bundles that individual shops have as well, depending on how strictly you would interpret such a law. Consumers would lose out on good deals relative to their own preferences, and suppliers would lose revenue. https://en.wikipedia.org/wiki/Loss_leader https://en.wikipedia.org/wiki/Loss_leader
- tschellenbach 5y agoOne of the main reasons why USA based companies win against EU based startups.
- autokad 5y agoi disagree. The US has arguably a better, larger, and cohesive economy. Also EU talent comes to the US because EU companies just dont value their tech workers as much. EU has to pay tech workers more, or else it will loose in tech, 100%. Lastly, there's regulation and taxes that makes it hard for businesses to develop.
- nosianu 5y agoOnly a part. In Europe you could not even become big, each country is too much its own market. It sis much much harder, or even impossible, to build a large company for all or even only for many European countries compared to building one for the entire US. I worked for a German IT (software) startup in Germany and also in the US, for that startup and before that for another large German company. We found that getting started in Germany was easier compared to the US, where the "winner takes all" mentality was also visible on the side of potential customers, so entrance into the market was hard(er). In Germany getting initial customers for unproven stuff was pretty easy in comparison. The problem is the switch from initial customers to scale. What made it easy to get started made it hard to achieve scale. When you get to a certain size and "fame" you get a big share of the entire US market. In Germany, but I think I can extrapolate to Europe, from what I experienced, the buyer side does not have a similar tendency to favor large already-winners and get them to become (European) champions. It's maybe not exactly completely valid examples, but I like them as illustrations: coffee machines or phones. In Germany (never mind Europe) even within the same company I found completely different phone systems and desk phones in different buildings (same with many other small parts). In the US, where I was sent to many big companies, I saw much less variety. Same with coffee machines, where every single department often has a different machine. In the US, more of the same wherever I went. I'd be interested what you guy think about my coffee machine and phone (and phone system) observations, if you have relevant experience. I saw this as a sign how buyer forces in the different countries (EU as a country) supports more but much smaller variety vs. fewer but large winners, but wasn't sure with my small sample.
- nbs_tar 5y agothe interplay between this pricing practice, and the proposed partial or wholesale bans on large tech cos making acquisitions is where it gets interesting. copy acquire kill just becomes...copy, undercut on pricing and kill. this pricing practice will become even more prevalent, and is much harder to regulate.
- mensetmanusman 5y agoThis is what China did to destroy the solar panel manufacturing in the U.S. as well. Some of my colleagues now were kicked out of that industry because US politicians didn’t respond to the tactic. Also, China is using this tactic now on critical speciality materials related to the global polymer supply chain.
- exporectomy 5y agoIsn't this also a criticism of open source software? The final paragraph says if you do it yourself, it's OK, but concerning if Facebook does it. So all the open source software mainly built by big tech companies is also predatory pricing? Where do you draw the line?
- DoctorOW 5y agoOpen source naturally allows for competition. Look at Chrome, Google employed all these predatory practices to get Chrome to the market share it is today, but a significant amount of that market share is split between Chromium forked competitors.
- native_samples 5y agoWhich Chromium based competitors have significant market share?
- DoctorOW 5y agoChromium Edge is more popular than Firefox is. Source: https://caniuse.com/usage-table https://caniuse.com/usage-table
- gimmeThaBeet 5y agoI see what you're saying, but then I also don't share the author's viewpoint. That may have a little to do with it. It is an interesting thought. What if you, as a company, create some open source that eliminates or genuinely competes with other companies? When a large company has the resources to foot the bill on some project, and just give it away as open source because it is not a core product, is that just as bad as any of the article cases? Some FB, Google, Amazon, MS et al. tool could be someone's entire business. Is it fair, open source or not, to release software for free, because you make money elsewhere such that you don't care about monetizing it? Is harming a competitors admissible if you literally never intend to directly profit off the endeavor? Imo, this line of thinking really challenges the point of the article, I don't know where you draw that line. I feel it would be interesting to evaluate a real example, though admittedly I can't think of one on the spot.
- neonate 5y agohttps://archive.is/fWslc https://archive.is/fWslc
- danielmarkbruce 5y agoThis is pretty shallow thinking. Facebook doesn't charge Facebook users for the service. Are they "losing money" because of that? Clearly not. Is there a way for them to make money out of Bulletin without explicitly charging writers? Let me think.... Lots of companies run negative cashflows for years before positive. The oil and gas industry get's to categorize drilling expenses "capital expenditure" and run it through their financial statements over many years. Intel builds a factory and does the same thing. If you could (and it's a reasonable position) run direct sales expenses for recurring revenue, and all R&D, through your financials as capital expenditures depreciated over 10-15 years... poof.. many so called Silicon Valley money losers are running positive net income.