Economics Oligopoly Questions Medium
Predatory pricing in oligopoly refers to a strategy employed by dominant firms in an industry to drive out or deter potential competitors by temporarily setting prices below their cost of production. The objective of predatory pricing is to create barriers to entry and maintain or increase market power.
In an oligopoly market structure, where a few large firms dominate the industry, predatory pricing can be used as a tool to eliminate competition and establish a monopoly-like position. By intentionally lowering prices below their average variable costs, the dominant firm aims to force smaller competitors out of the market, as they cannot sustain such low prices in the long run.
The predatory pricing strategy relies on the assumption that once competitors are driven out, the dominant firm can raise prices to recoup the losses incurred during the predatory phase and enjoy higher profits in the long term. This behavior is considered anti-competitive and can harm consumer welfare by reducing choice and potentially leading to higher prices in the future.
However, proving predatory pricing can be challenging, as firms may argue that their low prices are simply a result of cost efficiencies or legitimate competition. To determine whether predatory pricing has occurred, authorities typically analyze factors such as the firm's pricing behavior, its market power, the duration of the low prices, and the likelihood of recouping losses in the future.
To prevent predatory pricing, antitrust laws and regulations are in place in many countries. These laws aim to promote fair competition and protect consumers from anti-competitive practices.