However, Minnesota state law forbids the sale of drugs below their stated cost and limited the discount, thus putting an end to the price war. Target, looking not to be undercut, matched these drug price cuts. Set by the government, a price floor is the lowest price that goods or commodities can be legally sold at based on the minimum cost at which turning a profit is still possible. Walmart, seeking to undercut the competition, initially began offering certain prescription drugs at well below its price floor. The WalMart/Target drug warĪ prime example of predatory pricing tactics between two large franchises can be seen in the prescription drug price war between Walmart and Target in Minnesota. To find out how the initial benefits of predatory pricing inevitably turn into drawbacks, we looked at some examples. Even before Aristotle first coined the term “monopoly,” companies all over the world have practiced predatory pricing. Meanwhile, innovation is usually stifled due to the monopoly company now controlling the market.Ĭustomers will suffer from abnormally high prices from the monopoly, as well as a drop in the quality of the product or service. Product quality is likely to drop with no competition around to incentivize quality. Under such conditions, prices are likely to rise sharply to compensate for the initial period of short-term loss. Meanwhile, if the company employing predatory tactics is not regulated in accordance with the law, they will form a monopoly, having now successfully undercut the competition. Long-term effectsĬompetitors not capable of sustaining themselves against the predatory company will eventually be driven out of the market altogether. They also might benefit from aggressive competition in the market, if competitors are able to hold their ground, with higher-quality products and services as companies are motivated to establish an advantage over competitors. Companies that are not able to shoulder the loss, however, will suffer and lose a considerable amount of customers.Ĭonsumers will initially benefit from outrageously lower prices that the predatory company is selling at. Competitors may also finance a period of loss in order to keep pace with the predatory company. The company employing predatory pricing will run initially at a loss. While predatory pricing has some short-term positive effects-such as ultra-low prices for customers, for a brief time-it ultimately does serious harm to the state of the market. However, because a strategy like penetration pricing is temporary, not a long-term financial plan, and is not intended to operate at a deliberate loss, it is not illegal. There are various legitimate sales strategies that involve the use of competitive price-lowering practices, for example, penetration pricing in which a company temporarily lowers its prices by a small percentage in order to capture a larger market share and penetrate more deeply into the market. If pricing is set lower by a business for reasons other than to eliminate competitors, then pricing is not considered predatory. However, it’s hard to prove monopolization behind predatory pricing, as companies can insist that their pricing was lowered for other reasons. American antitrust lawsexist to preserve competition in the market and minimize monopoly power, and according to those laws, most forms of predatory pricing are illegal.Ī pricing strategy is considered predatory if its goal is to price competitors out of the market. Predatory pricing is a monopolistic practice, and there is a l ong history of legislationagainst monopolistic behavior in the United States, with predatory pricing coming under that banner. Is predatory pricing illegal in the U.S.?
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