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Chapter 11: Q 19 (page 272)

What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it should be illegal?

Short Answer

Expert verified

Restrictive practice to curb competition.

Step by step solution

01

Step1. Definition

Predatory pricing is a practice of aggressive price cuts to keep the price so low that it drives competition out of market. Such firms incur losses in short term to cut down competition and thereafter, charge abnormally high prices when they have comparatively higher monopoly power.

02

Step2. Explanation

The practice reduces competition because it makes the prices so low that firms in market have to shut down and the new entrants might find the prices unattractive to enter the market and make business.

Predatory pricing technique is difficult to identify because it is difficult to distinguish if the firm is practicing predatory pricing or cutting prices because of high competition in the market.

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