Final answer:
In the scenario where Walmart uses predatory pricing to force Sal-Mart out of the market, they are behaving like a monopolist trying to deter competition. Proving predatory pricing involves showing that prices are below average variable cost, which can be challenging to ascertain, as seen in cases like the Microsoft antitrust trial.
Step-by-step explanation:
When Walmart engages in predatory pricing to drive competitors out of the market, it's using its ability to produce at much lower costs to deter new entrants, essentially behaving as a monopolist. Predatory pricing is the strategy where a firm significantly lowers its prices to eliminate competition and then raises them again once the threat is removed.
The practice of predatory pricing, however, is difficult to prove. In the case of American Airlines potentially engaging in predatory pricing against a new entrant, one would have to demonstrate that American Airlines was selling tickets at less than its average variable cost, implying the prices are unsustainable in the long-term.
In the context of the Walmart scenario, predatory pricing is taking place when Sal-Mart enters the market and Walmart lowers its prices to a level where Sal-Mart can no longer compete, potentially forcing Sal-Mart to exit the market. Once Sal-Mart is out of the picture, Walmart may raise the prices back up, exploiting its monopolistic position. It's important to note that while predatory pricing can create barriers to market entry and be a violation of U.S. antitrust law, proving it in a court of law can be quite complex.
Understanding Predatory Pricing
To understand when pricing is genuinely predatory, one looks at whether the firm is selling below its average variable cost, which suggests pricing is aimed not at competition, but at destroying rivals. Yet, determining the average variable cost and distinguishing it from fixed costs in real-world situations can be a challenging task. Cases like the Microsoft antitrust trial have highlighted how difficult it can be to delineate what constitutes illegal anti-competitive behavior under these circumstances.