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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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Most popular questions from this chapter

What is exclusive dealing? How might it reduce competition and when might it be acceptable?

Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology required having a wire running to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)

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