Wal-Mart reducing its prices to the point that the competition cannot compete, and American Airlines reducing its ticket prices to below cost and increasing the frequency of its flights are two examples of predatory pricing. By reducing their prices to these extremely low levels, large businesses hope to put small competitors out of business and create a monopoly. Large businesses can handle short-term losses if it leads to the elimination of competition in an area.Continue Reading
Generally, low prices provide a benefit for consumers, since they can save money. The problem occurs when retailers offer certain goods at prices below cost until it forces competitors to close their doors for good. Then, the retailer can charge a much higher price for the same product, since the consumer does not have any other options.
Not every instance of a company dropping its prices constitutes predatory pricing. When a particular industry is saturated with options, a company would not have much luck dropping its prices, since it could take a long time to eliminate all of the competition.
Predatory pricing only violated federal anti-trust laws when its purpose is to create a monopoly in the industry by attacking other companies through below cost pricing. If this practice could create a monopoly, the federal government sometimes steps in and stops the process.Learn more about Economics