Ruqayyah Snyder
Predatory pricing is a commercial strategy where a company with substantial market power sets its prices at a very low level to damage or eliminate its competitors. This anti-competitive behaviour is illegal in Australia under the Competition and Consumer Act 2010 (Cth) and the Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth). The Australian Competition and Consumer Commission (ACCC) is responsible for investigating claims of predatory pricing. This paragraph will explore the topic of predatory pricing in Australia, including its legality, impact, and relevant legislation.
| Characteristics | Values |
|---|---|
| Legality in Australia | Illegal |
| Governing Legislation | Competition and Consumer Act 2010 (Cth), Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth), Australian Consumer Law |
| Responsible Body | Australian Competition and Consumer Commission (ACCC) |
| Definition | A strategy of implementing substantially low prices for an anticompetitive purpose |
| Purpose | To acquire new customers, create barriers for new entrants, push current competitors out of the market, and achieve greater market share |
| Impact | Negative implications on other companies and consumers, reduction of businesses in a market, consumer harm, and increased prices for consumers |
| Examples | Kmart, AKZO, Tetra Pak, Wanadoo Interactive, Cabcharge Australia Ltd |
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What You'll Learn
Predatory pricing is illegal in Australia under the Competition and Consumer Act 2010
Predatory pricing is a commercial strategy where a company with a substantial market share sets its prices at a very low level over a sustained period to eliminate or drive away competitors from the market. This is done to create barriers for new entrants and gain a stronger market position. While low prices may seem beneficial for consumers, they can lead to significant long-term disadvantages, including reduced choice and higher prices.
In Australia, predatory pricing is illegal under the Competition and Consumer Act 2010 (Cth), which is a national law governing business practices, consumer rights, and anti-competitive behaviour. The Act prohibits corporations with substantial market power from misusing it for their commercial advantage. This means that a company with a substantial degree of market power cannot deliberately set prices at extremely low levels with the purpose or effect of damaging or eliminating competition.
The Australian Competition and Consumer Commission (ACCC) is responsible for investigating claims of predatory pricing. However, proving predatory pricing can be challenging due to the need to demonstrate clear anti-competitive intent.
In 2017, the Australian government amended the Competition and Consumer Act by introducing an "effects test". This test determines predatory pricing if a firm sells goods or services at prices likely to lessen competition, regardless of firm market power. This amendment expanded the definition of predatory pricing and addressed concerns about the potential negative impact on competitive behaviour.
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Predatory pricing is a misuse of market power
Predatory pricing is a deliberate strategy employed by businesses with a substantial degree of market power to set prices at extremely low levels over a sustained period. While low prices may seem beneficial to consumers, they can have the opposite effect in the long term. This strategy is used to attract consumers and create barriers for new businesses entering the market.
The purpose of predatory pricing is to acquire new customers, push current competitors out of the market, and prevent new entrants from entering the market. By setting prices very low, competitors are forced to exit the market as they cannot match these prices. This results in a reduction of businesses in the market, giving the company implementing the pricing scheme a greater market share and sometimes a monopoly.
Predatory pricing is considered a misuse of market power and is illegal in Australia. It contravenes Australian Consumer Law and the Competition and Consumer Act 2010 (Cth), which prohibits corporations with substantial market power from misusing it for their commercial advantage. The Act defines predatory pricing as a dominant firm employing the method of undercutting or underselling with the intention to force competitors out of the market or prevent entry.
The Australian government amended the Competition and Consumer Act in 2017 by introducing an "effects test" to determine predatory pricing. This test considers whether a firm is selling goods or services at prices likely to lead to a reduction in competition, regardless of firm market power. This amendment expanded the definition of predatory pricing to include the effect of below-cost prices in reducing competition.
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Predatory pricing harms consumers in the long run
Predatory pricing is a strategy used by businesses to eliminate or drive away competitors from the market. This is done by setting prices at a very low level over a sustained period. While low prices may seem beneficial to consumers, they can actually have the opposite effect in the long run.
Predatory pricing can lead to a reduction in the number of businesses in a market. As a result, the company implementing this strategy can gain a larger market share or even a monopoly. This provides the company with the power to engage in destructive behaviours, such as increasing prices to recoup their losses. Consumers will be forced to accept fewer options and higher prices for the same goods and services in a monopolistic market.
The two stages of predatory pricing are predation and recoupment. During predation, a dominant firm offers goods and services at a below-cost rate, leading to a reduction in short-term profits. In the second stage, recoupment, the firm readjusts its prices to approach monopoly prices to recover its losses in the long term. This price adjustment can put consumers under pressure, as they have to accept higher prices without any fair-priced competition, resulting in consumer harm.
Predatory pricing can also have negative effects on a company's home market and domestic suppliers and producers. This practice, known as "dumping", involves a company gaining a foothold in a new market by maintaining high prices in its home market. However, there is a risk that the loss-making product will find its way back to the home market and drive down prices, resulting in negative consequences.
In Australia, predatory pricing is illegal and is governed by the Competition and Consumer Act 2010 (Cth) and the Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth). It is considered a misuse of market power and companies found engaging in such practices may face legal consequences.
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Predatory pricing is a two-stage strategy
In Australia, predatory pricing is illegal. It is a strategy used by businesses to gain a competitive advantage by deliberately setting prices at an extremely low level over a sustained period. This strategy is often employed by companies with a substantial degree of market power and is aimed at eliminating or substantially damaging smaller competitors.
The second stage is the recoupment phase. Once competitors have been driven out or new entrants deterred, the dominant firm readjusts its product and service prices to approach or reach monopoly prices. This price adjustment can put consumers under pressure as they are now forced to accept higher prices without any fair-priced competition, resulting in consumer harm. This is the ultimate goal of predatory pricing—to create a monopoly and further strengthen the company's market position.
This two-stage strategy has been identified by Joskow and Klevorick, who propose a two-tier approach to identifying predatory pricing. The first stage involves analysing the structural characteristics of the market and the market power of the firm allegedly engaging in anti-competitive behaviour. The second stage involves behavioural considerations that may demonstrate predation, such as pricing below average variable cost.
Predatory pricing is not always easy to identify or prosecute. Defendants may argue that lowering prices is a normal business practice in a competitive market rather than a deliberate attempt to undermine competitors. However, the negative consequences of predatory pricing are significant, leading to reduced competition, higher prices for consumers, and potential job losses.
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Predatory pricing is challenging to prove
Predatory pricing is a commercial strategy where a company with a substantial market share sets prices at a very low level over a sustained period. This is done to eliminate or substantially damage competitors, who are unable to match the prices and are forced to exit the market. While predatory pricing is illegal in Australia, it is challenging to prove due to several reasons.
Firstly, predatory pricing is often a deliberate and concerted effort by a business to use its market advantage to damage competitors. However, it can be difficult to demonstrate that a company with significant market power intends to misuse that power. The mere act of price-cutting or underselling competitors, even with a significant market share, does not constitute predatory pricing. There must be clear anti-competitive intent or evidence that the pricing strategy resulted in diminished competition.
Secondly, predatory pricing involves setting prices below cost or at a level that causes short-term losses. While this may seem like a straightforward indicator, it is important to consider that not all businesses operate with the same cost structure. Two businesses in the same industry may have different cost structures due to factors such as economies of scale or access to cheaper resources. Therefore, what may appear to be below-cost pricing for one business may not be the case for another.
Thirdly, proving predatory pricing requires evidence of barriers to entry, market power, and the likelihood of future price increases. This evidence can be challenging to obtain, especially for new entrants who may be deterred from entering the market due to the low prices set by the dominant firm. Additionally, internal documents or plans that outline the firm's strategy may be difficult to access or may not exist at all.
Moreover, predatory pricing cases can be complex and time-consuming, involving economic analysis and an understanding of market dynamics. The Australian Competition and Consumer Commission (ACCC), the primary body responsible for investigating claims, may face resource constraints or prefer to focus on other competition issues.
Lastly, the defence that predatory pricing is a rational strategy may be used. While this defence is not commonly accepted, it is possible for predatory pricing to be considered a response to market conditions or a way to increase market share. In some cases, businesses may argue that they are simply being competitive and offering attractive prices to consumers.
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Frequently asked questions
Yes, predatory pricing is illegal in Australia. It is considered a misuse of market power under Australian Consumer Law and is governed by the Competition and Consumer Act 2010 (Cth) and the Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth).
Predatory pricing is a strategy employed by a business to gain a greater market share and sometimes a monopoly. It involves setting prices at an extremely low level over a sustained period with the intention of eliminating or substantially damaging competitors.
Predatory pricing results in a reduction of businesses in a market, leading to fewer options and higher prices for consumers in the long run.
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