Q&A - What is predatory pricing?

With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law.

The key concern with predatory pricing is that its use is considered to be anti-competitive, and therefore not in the best interest of consumers in a market.

Consider a market where demand from customers is very sensitive to price (high price elasticity of demand). A potential new entrant to the market has an exciting new product which it believes customers will value and demand.

The existing competitors in the market see the new entrant about to launch - and immediately begin to lower prices to retain their customers. If the new entrant cannot match the lower price (or provide a product which customers still believe represents value for money) then they may choose not to enter the market. Who loses? Customers, who are denied a wider choice. Price has therefore become a barrier to entry.

The use of predatory pricing is quite hard to prove. What is the difference between a significant price discount being offered as part of a sales promotion and so-called predatory pricing? One key consideration is the period of discounted prices. Is it just for a short period? Or is it sustained over a relatively long period so that it has the desired competitive effect?