THE purpose of competition law, among others, is to promote competition in markets and to prohibit any conduct inconsistent with such markets and other purposes of competition law.
This article outlines what predatory pricing (an anti-competitive conduct) is and the effects and consequences of engaging in such conduct.
Predatory pricing is an abuse of dominance that occurs when a dominant firm deliberately reduces prices to loss-making levels when faced with competition from an existing competitor or a new entrant to the relevant market, causing the competitor to exit the market.
When the existing competitor has exited the market or the new entrant having been foreclosed, the dominant firm then raises its prices to monopoly prices. What drives a firm to engage in predatory pricing is the expectation that the long run profits will be more than enough to compensate for profits forgone in the short-run.
The effect is to exclude or foreclose, or be likely to exclude or foreclose, one or more of the firm’s actual or potential competitors, thereby strengthening or maintaining its market power. The subsequent high prices are made possible by the exclusion of the competitors.
Price reduction is not automatically predatory and, in fact, lowering prices can be a direct result of intense competition.
Accordingly, caution is exercised in analysing predatory pricing cases to avoid a signal that prevents dominant firms from lowering their prices to competitive levels for fear of being prosecuted for predatory pricing.
Sometimes the low-pricing firm is simply more efficient. Pricing below own costs is therefore not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has an undesirable probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as petroleum retailing, it is unlikely that one firm could price below cost long enough to drive out a significant number of rivals and attain a dominant position.
- Effects, consequences of predatory pricing
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Anti-competitive effects of predatory pricing
These include the following: Market exclusion: competitors are forced out or discouraged from entering the market, leading to reduced competition; market dominance: predatory pricing facilitates monopoly or dominant market positions;
Predatory pricing is used as a strategy to gain market share, establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.
Prohibition of predatory pricing
The Competition Act [Chapter 14:28] (the Act) prohibits predatory pricing as an unfair business practice. Section 2 of the Act defines an unfair business practice as a restrictive practice or conduct specified in the First Schedule.
Paragraph (8) of the First Schedule defines predatory pricing as selling at very low prices or at below production costs as a deliberate strategy of driving competitors off the market. In terms of Section 42 of the Act, acts or omissions specified in the First Schedule are unfair business practices for the purposes of the Act. The Act also provides for criminal liability for any person who engages in predatory pricing.
Section 42 (3) of the Act provides that: “Any person who enters into or engages in or otherwise gives effect to an unfair business practice shall be guilty of an offence and liable: — a) in the case of an individual to a fine not exceeding level twelve or to imprisonment for a period not exceeding two years or to both such fine and imprisonment; and b) in any other case to a fine not exceeding level fourteen.”
In assessing a predatory pricing case, the commission adopts a balancing act between the anti-competitive effects of the conduct on one hand and any technological, efficiency or other pro-competitive gain on the other.
After establishing a case of predatory pricing, the commission refers the matter to the National Prosecuting Authority for prosecution and the appropriate level of fine.
- This article was written and published by the Competition and Tariff Commission in its 2024 fourth quarter newsletter.
