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Predatory Pricing

Economics notes

Predatory Pricing

➡️ Limit pricing is a pricing strategy used by firms to limit the entry of new competitors into a market.
➡️ It involves setting prices low enough to discourage potential entrants from entering the market, but high enough to still generate a profit.
➡️ Limit pricing can be used to maintain market power and protect existing market share, but can also lead to reduced competition and higher prices for consumers.

What is predatory pricing and how does it affect competition in the market?

Predatory pricing is a pricing strategy used by dominant firms to drive out competitors from the market by setting prices below their cost of production. This strategy is aimed at creating barriers to entry for new firms and maintaining market power. It can lead to reduced competition, higher prices, and lower quality products for consumers.

What are the legal implications of predatory pricing?

Predatory pricing is illegal under antitrust laws in many countries, including the United States. The laws prohibit firms from using their market power to engage in anti-competitive behavior, including predatory pricing. Firms found guilty of engaging in predatory pricing can face fines, damages, and other legal penalties.

Can predatory pricing ever be beneficial for consumers?

While predatory pricing can lead to reduced competition and higher prices in the short term, it can also lead to lower prices and increased competition in the long term. If a dominant firm is forced to lower its prices to drive out competitors, it may eventually face new competition from firms that enter the market once the barriers to entry are lowered. However, this outcome is not guaranteed, and the negative effects of predatory pricing on competition and consumer welfare are generally considered to outweigh any potential benefits.

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