Final answer:
Leader pricing is a strategy where prices are set slightly above the cost to comply with minimum-markup laws and make a minimal profit. It differs from predatory pricing, where prices are unsustainably lowered to eliminate competition, a practice prohibited by antitrust laws but hard to prove.
Step-by-step explanation:
The pricing strategy referred to in the question is leader pricing. Leader pricing involves setting prices just slightly above cost to meet minimum-markup regulations and secure a minimal return on promotional sales. This is distinct from predatory pricing, which is an aggressive strategy where a business deliberately lowers prices to a level that is not sustainable over the long term, with the intent to undercut competitors, potentially driving them out of the market. Predatory pricing is considered a violation of U.S. antitrust laws.
However, it is a complex area of law enforcement because it can be challenging to differentiate between competitive market pricing and genuine predatory practices.
For instance, if a company reduces prices to match those of a new entrant in the market, it might be construed as normal competition rather than predatory pricing unless the established firm is selling below its average variable costs, suggesting an intention to force the competitor out of the market. Nonetheless, understanding and determining average variable costs in real situations can be quite difficult, further complicating the identification of such practices.