What are the different types of predatory pricing and their consequences?

Predatory pricing refers to a strategy employed by dominant firms in a market to drive out competition by temporarily setting prices below their costs. This practice is considered anti-competitive and can have significant consequences for both the market and consumers. There are several types of predatory pricing, each with its own characteristics and potential consequences.

1. Temporary Price Reduction: In this type, a dominant firm lowers its prices below its costs for a short period to drive competitors out of the market. The consequences of this strategy can include reduced competition, decreased consumer choice, and potential monopolistic control by the dominant firm once competitors are eliminated.

2. Loss Leader Pricing: This strategy involves selling a product at a loss to attract customers and increase sales of complementary products. The consequences of loss leader pricing can include smaller competitors being unable to match the low prices, leading to their exit from the market. This can result in reduced competition and potential monopolistic control by the dominant firm.

3. Predatory Bidding: Predatory bidding occurs when a dominant firm deliberately underbids competitors in order to secure contracts or projects. This can lead to the exclusion of smaller competitors who cannot afford to match the low bids, resulting in reduced competition and potential monopolistic control by the dominant firm.

4. Margin Squeeze: Margin squeeze occurs when a vertically integrated firm with both upstream and downstream operations sets high prices for its upstream products while simultaneously lowering prices for its downstream products. This can squeeze out competitors who rely on the upstream products, leading to reduced competition and potential monopolistic control by the dominant firm.

The consequences of predatory pricing can be detrimental to the market and consumers. Reduced competition can result in higher prices, lower product quality, and decreased innovation. Additionally, predatory pricing can discourage new entrants from entering the market, further limiting competition and consumer choice. Overall, predatory pricing practices can harm market efficiency and consumer welfare.