Even though everyone loves a bargain, Australian Consumer Law prohibits businesses with substantial market power from setting the prices on their products too low. While this might seem counter-intuitive at first glance, this commercial strategy, known as predatory pricing, can ultimately damage competitors, reduce choice and in fact, increase prices for consumers. This article sets out predatory pricing: what it is, why the law prevents it and why it disadvantages consumers in the long term.
What is Predatory Pricing?
Predatory pricing is a commercial strategy that occurs when a company with substantial market power or ownership of shares sets their prices at a sufficiently low level so as to damage their competitors, who due to their smaller size, cannot match the low prices offered by their more powerful competitor. Predatory pricing is what is known as a misuse of a business’ market power.
Misuse of Market Power
A key criterion in predatory pricing is that the company employing the strategy has significant market power or share. When a business has enormous market share or power, they can carry on their commercial activities in a manner unconstrained by the usual limits of competitors, suppliers or customers. It is for this reason that any entity with significant market share perturbs consumer advocates as well as regulators.
Irrespective of whether the business intends to misuse their power, simply having the significant market power gives them the opportunity to do so quite easily and may, in some circumstances, present sufficient temptation to misuse their power.
What is the Effect of Predatory Pricing?
Predatory pricing is more than just reducing prices. It reflects a deliberate and concerted effort on the part of a business to use their advantage in the market to damage competitors. Unsurprisingly, it usually results in significantly impairing competitors or eliminating them from the market altogether. It also dissuades and deters potential competitors from even entering the market. Predatory pricing also has a negative knock-on effect and can deter and prevent other entities from acting competitively in that market or another one.
Restricting predatory pricing may seem odd at first glance. After all, when prices go down, consumers benefit. However, while consumers may gain in the short term from lower prices, in the long term there are fewer businesses in the market. With minimal competitors, a company can engage in behaviour that harms consumer interest. For example, they can raise prices beyond what is necessary to maintain a profit margin. Also, there are other, more ephemeral effects of less competition in a market. Stifling competition can also indirectly work to stifle innovation and development. These suffer not only because fewer people are thinking about how to overcome the difficulties in a market or industry or how to make it better. The business with the significant market share also has less incentive to innovate. When profit levels are so good and so stable, a company typically sees little need to spend a lot of money on progress. This lack of impetus might affect the wider economy and could work to stifle growth and development on a national level.
Unsurprisingly, predatory pricing is illegal. The Competition and Consumer Act 2010 (Cth) (‘the Act’) prohibits corporations with substantial market power from misusing it for their commercial advantage. This prohibition stands for companies who engage in predatory pricing but cannot, or ever hope, to recoup the losses made through this conduct. In addition to a general prohibition on misusing market power, the Act also explicitly bans predatory pricing.
However, it is important that all business owners understand that merely price cutting or underselling competitors are not predatory pricing. That applies even if they do have significant market share. For pricing to be predatory, there must be:
- Sustained very low pricing; and
- An anti-competitive purpose; and
- Substantial market power.
As predatory pricing requires a clear anti-competitive intent, proving it is enormously challenging to the Australian Competition and Consumer Commission (ACCC). Exacerbating this difficulty is the fact that, initially at least, predatory pricing seems to be pro-competition. For example, in the financial year 2010-2011, the ACCC received 276 complaints concerning this kind of behaviour. The ACCC further assessed fifty-seven of these, initially investigated thirteen and thoroughly investigated five. The ACCC instigated no proceedings in that year.
When a business controls a substantial amount of power in a particular market and abuses their position by engaging in predatory pricing, this can damage both competitors and consumers. Although it is difficult to make a successful claim to the ACCC about a business potentially engaging in predatory pricing, it’s important to be aware of the concept if you are involved in a competitive industry.
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