I have been reading the posts of this subreddit for a time, and I got two seemingly contradictory statements from the posts:
- predatory pricing is harmful for the consumers in the long run.
- "dumping" by another country (let's say, China) is beneficial for the consumer.
However, afaik, isn't that both of them are the same? Both are selling products in a lower-than-normal prices for the purpose of increasing market share and destroy competition? If so, then why are one harmful and the other beneficial to the consumer?
Thanks for answering.
What is the difference between predatory pricing and "dumping"?
byu/Cubelite inAskEconomics
Posted by Cubelite
1 Comment
Predatory pricing is pricing low so as to gain market share by forcing out rivals who can’t weather losses. It’s very hard to find successful predatory pricing cases, albeit there are some. The classic antitrust (Chicago) view was that it’s very difficult to do because once prices return or go up from consolidation, firms would naturally seek to reenter the market. The classic writing on this is McGee who looked at standard oil of NJ who arguably maintained the market control through expansion. Though mergers would be a far more likely strategy than predation. It was originally seen as a theoretical possibility but not something we would observe empirically.
Game theoretical models later on gave reason why predation could work through information (signaling, asymmetric information). So it’s seen as more plausible theoretically.
The main case of predatory pricing in antitrust texts is American tobacco trust. The strategy was to release competing brands to drive down profits of competitors and then buying them out at lower prices. However, most modern cases have been inconclusive like Microsoft (not found guilty of predation) and Amazon. It’s just not a very likely viable strategy and so we generally don’t see any clear cases of firms using it.
The reason we would still say predation is bad is because by definition, it implies future price increases from market consolidation. So it’s rare, but if it occurred, sure it would be bad in the long run for consumers.
Dumping is no different in principle. It’s selling below cost to expand domestic industry in order to reduce international competition long run. The issue with dumping is it’s even less likely to be successful given that it’s harder to commit to trade barriers and reduce all global competition in the long run.
Basically, both are pretty unlikely successful strategies to raise prices long term. And in the meantime, both predation and dumping will have immediate benefits.