Final answer:
Predatory pricing is a strategy to deter competitors by reducing prices unsustainably low, but it's hard to prove as it can be confused with legitimate competition.
Step-by-step explanation:
Predatory Pricing Explained
Predatory pricing is a strategic approach used by an established firm to deter new competitors. It involves temporarily reducing prices to a level so low that new entrants cannot compete, ultimately driving them out of the market. Once the threat is eliminated, the firm can raise its prices again. Predatory pricing, as this is known, is often seen as a violation of antitrust laws, but it can be challenging to prove. A potential indicator of this practice is if a firm is selling below its average variable cost, essentially at a price point that would typically necessitate shutting down operations.
Difficulties in Identifying Predatory Pricing
One of the main challenges with predatory pricing is the difficulty in differentiating it from legitimate price competition. For example, when American Airlines matches the lower prices of a new competitor, it raises the question of whether they are engaging in predatory behavior or simply competing in the market. The determination often comes down to the analysis of cost structures, which is complex and not always clear-cut in practice.
A Real-World Case
The Microsoft antitrust case is a prime example where predatory pricing allegations were in the spotlight, illustrating the grey areas in restrictive practices that can exist in business.