Question

Skimming is a pricing strategy in which a product is first priced below the price of competitors' products to quickly penetrate the market at the competitors' expense and then raised to target levels.

Answer 1

Predatory pricing is a strategy where a firm lowers prices below production costs to eliminate competitors, after which it raises prices again. It's different from skimming and is considered illegal under U.S. antitrust law, but is hard to prove.

Step-by-step explanation:

The concept described in the question is not skimming, but rather predatory pricing, which is a potentially illegal business practice according to U.S. antitrust laws. Predatory pricing occurs when a company sets prices below the cost of production—often lower than its average variable costs—with the intent to drive out competitors. This strategy can create barriers to entry for new competitors, as they may not sustain the financial losses that an established business with deeper pockets can endure.

Once competitors are driven out, the company employing predatory pricing can raise its prices without the pressure of competition. This practice can be very damaging to a market's health, as it reduces consumer choice and can lead to higher prices in the long run.