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There's no evidence predatory pricing is effective. It's fear mongering. Suppose you have company A trying to outprice company B, which is a much smaller compa

• aninhumer 12y ago
  >it has to drop prices on the whole line of products of its own. Why? >And who's to guarantee another company C isn't going to use the situation, knowing full well company A cannot afford another round of predatory pricing? The competitiveness of a market depends on the costs of entering it. If the amount of capital needed to enter the market is significant, new entrants willing to risk that much will be much less frequent. Predatory pricing allows monopolies to artificially raise those costs, simply by amassing a reserve of cash. Indeed, the real problem is not company B being defeated, but company B never even trying because the returns just aren't enough to justify the inflated entry cost. Company C never gets a chance.
  • snitko 12y ago
    > Why? Suppose you produce socks and another company does the same and tries to compete. You produce 1 million socks a month and another company only 10 thousand. You obviously can't just drop prices on 10 thousands socks of yours, because that would still allow your competitor to stay in business - since there is demand for the rest of 990k of socks at your high price, your competitor would simply grab another 10k of your socks market share and then you'll only be able to sell 980k at your high price and not 990k. You actually have to drop prices on all 1 million socks of yours, which is going to be pretty damn detrimental to your profits. > The competitiveness of a market depends on the costs of entering it. What's there to prevent a rich investor from entering the market and competing? Google had no problem competing with Apple on the smartphone market, it seems. The goal is not to allow anyone with no money to compete. The goal is to allow to compete companies who have sufficient resources to do so. That's what the competition is about.
    • aninhumer 12y ago
      >You obviously can't just drop prices on 10 thousands socks of yours, because that would still allow your competitor to stay in business Ah sorry, I misunderstood. I thought you were suggesting they'd have to drop prices on a range of different products. >What's there to prevent a rich investor from entering the market and competing? The fact that there isn't an infinite supply of rich investors queueing up to disrupt markets. And that there are likely much better investment opportunities than entering an expensive price war just to gain a foothold in a newly competitive market (at which point company C can enter, and reap the same benefits without the inflated upfront costs).
    • makomk 12y ago
      > You produce 1 million socks a month and another company only 10 thousand. You obviously can't just drop prices on 10 thousands socks of yours, because that would still allow your competitor to stay in business Except that with internet access, you can do exactly that. Any new competitor is going to have to choose to wire up a particular set of neighbourhoods with a particular 10 thousand customers in, and they're going to need a decent proportion of people in those neighbourhoods to sign up in order to make a profit. You can easily cut prices just for customers served by your smaller competitor whilst leaving them the same for everyone else - it doesn't matter that there's still demand elsewhere, because your competitor doesn't have infrastructure elsewhere.
      • snitko 12y ago
        Very good example of a difficult problem. The answer to it is not government. I always challenge myself and others with this: if you had a problem for which government seems like a very reasonable answer, can you design a better solution? And indeed, you can. In this example you have to realize that what government is selling to consumers is the service of preventing eventual rise in prices after the competition is weeded out. If, as a consumer, I am worried about such predatory pricing as in your example, what is to prevent me from signing a contract with a company which specifically states "you are not allowed to raise the price"? Then this contract can be enforced by whichever private court and protection agency I hired (how this would work is a matter of a separate post, but I recommend reading "The Machinery Of Freedom" by David D. Friedman on that subject). However, I don't really think you'd need that contract. What would really happen is that many companies would have infrastructure in many places (as is the case in my country) or you would have alternative connections (as, again, is the case in my country with a 4g operator Yota). Or you would have willing rich investors if they see that opportunity exists to disrupt the market. Finally, people may move and stop using the service if they dislike it. There are all sorts of opportunities. Government is just one solution with a very high cost indeed: you have many people die in bloody wars which are run for your tax money and on your behalf (as is the case with both of our countries, I suppose). And no, however you wanted it, with government you can't have only the good things and none of the bad ones. It's logically impossible, because for a politician the economic incentives are always in the wrong place.