PREDATORY PRICING Group: 2 Section: B Ayan Chatterjee (2011050) Debabrata Kar (2011061) Esheeta Ghosh (2011071) Harendra Kumar

(2011084) Kallol Sarkar (2011096)

Predatory pricing is generally defined as sales below cost by a dominant firm over a long enough period of time for the purpose of driving a competitor from the market. After eliminating the competitors from the market, the predator firm then raises prices to supra competitive levels to recoup its losses and render the practice profitable. A company trying enter the market or that segment sells the product at a lower price in order to attract the customers but this kind of technique not termed as Predatory Pricing

Predatory pricing is different from normal pricing cut why? As predatory pricing is done by a dominant firm for eliminating the competition. In case of normal price reduction the firms tries to increase their market share by slashing the prices of their product.

The predatory pricing under the Act means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of goods or provision of services, with a view to reduce competition or eliminate the competitors

Traditional theory: The predation stage The post-predation stage Modern Theory: The predatory firm has access to some information that other firms dont have which it uses to drive the firms out or to deter new entrants in the market. Financial Market predation Reputation predation Cost signalling model Demand signaling Test market Predation

Predatory pricing is defined in Economic terms as a price reduction that is profitable only because of added power the predator gains from eliminating, disciplining or otherwise inhibiting the competitive conduct of a rival or potential rival.

PORTERS FIVE FORCES FRAMEWORK

The framework assumes a perfect and static market structure which is rare

It does not focus on strategic alliances between companies and other forms of collaboration
It does not focus on the complementing products

Dominance : Since large capital reserves are needed to sustain the losses during the below cost selling period, hence only a dominant firm would be able to practice predatory pricing. Barriers to entry and re-entry : Successful predatory pricing requires certain level of entry barriers to the market. Otherwise other potential rivals would immediately re-enter the market once the predator raises its prices and by adding their output to that of the predator drive the prices back to competitive level Excess Capacity : Excess capacity is a pre-requisite for predatory pricing. The predator must be able to absorb all the new demand created by its price cuts, and in the case of predation against existing rivals, the predator must be able to absorb the rivals sales. Non-price Predation: excessive product differentiation, predatory advertisement and investment, predatory product innovation Others : Examining market share trends during the period of predation is important for recoupment analysis. Low price elasticity of demand facilitates recoupment as demand will decline relatively less when the firm raises the market price. If a predator enjoys greater brand royalty, the less costly a predatory pricing shall be for the firm.

VARIOUS COSTS UNDER COMPETITION LAW

13

Its the actual cost of production including items Cost of material consumed Direct wages and salaries Direct expenses Work overheads Quality control costs R&D cost Packaging Finance and Administration cost

Total Fixed Cost- those which do not change with output over a given time period.
Total Variable Cost- Its the difference between total Cost and total fixed cost, and share of fixed overheads in any during the said period. Total Avoidable Cost- The total cost that could have been avoided if the enterprise had not produced the quantity of extra output during the referred period. Average Avoidable Cost- The total avoidable cost divided by the total output considered for estimating total avoidable cost.

Long-run Average Incremental Cost- The increment to long run average cost on account of an additional unit of product, where long run cost includes both capital and operating costs.
Market Value- The consideration which the customer pays or agrees to pay for a product which is sold or provided or can be sold or provided, as the case may be. Marginal Cost- it is the change in the total cost that arises when the quantity produces changes by one unit.

Areeda and Turner suggested that pricing below short run marginal cost is economically inefficient.
If a firm is found to set price below short run marginal cost, then it reflects predatory intent. Use of AVC as a proxy for SRMC. Any price between ATC and AVC is allowed. But if price between AC and AVC its predatory.

Alternate to the Areeda-Turner rule on average total cost.

Price below ATC is predatory, only if accompanied by substantial evidence of predatory intent. A firm makes loss if price is below ATC, but it is still profit maximizing by continuing production so long price is above the AVC.

20

Paul Joskow & Alvin Klevorick

Ist Stage:- Examines the market structure IInd Stage:- Examines the cost based or pricing behavior test

Assumes that predatory pricing is happening Evaluates both the predator firm as well as its targets. Compares if predator company would be able to cover its losses it sustained during the attack.

Whether a firm intended to engage in predatory pricing? Direct Evidence:- Documents proving predatory intent. Indirect Evidence:- Continuous targeting the competitors price cut, frequency of price cuts.

Incumbent firm cuts down its prices in case of new entry. For the new entry it becomes tough to sustain and it quickly exits Incumbent firms raises its price to original level. Does not only forces the competition to exit but also deters any future intent.

AKZO v COMMISSION [1991] TETRA PAK INTERNATIONAL SA v COMMISSION DEUTSCH POST AG [2001] BROOKE GROUP LTD. v. BROWN & WILLIAMSON TOBACCO CORP MATSUSHITA V. ZENITH RADIO CORP.

Very perplexing and quite puzzling.

Ambiguity between predatory pricing and other desirable forms of price cutting. The antitrust laws should adequately curb the predatory pricing without overly deterring competitive price cutting.

Thank You

27