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Lower Pricing or Giant Predator PDF Print

Quite recently the Commission has received a number of complaints of predatory pricing. One may ask, what exactly is predatory pricing? Consider the following example:

“Smithys a bucket store, controls 85% of the bucket retail industry – They decide to cut their prices to below cost, yes BUT only for a time. They start selling their buckets at $2.00 for the next six months while their competitors can only afford to sell at $5.00. Everyone is buying from Smithys and during that time their competitors are loosing sale after sale. These smaller competitors can not sustain such a drop in sales and are forced out of business. After eliminating the competition Smithys raises their prices again now selling at $8.00.

This scenario above would represent a classic case of Predatory Pricing. By definition it is the practice of a firm selling a product at a very low price (usually below cost) with the intention of driving competitors out of the market, or creating a barrier to entry into the market for potential new competitors.

If the other firms cannot sustain equal or lower prices without losing money, they go out of business. The predator then has fewer or no competitors, allowing it to raise prices above what the market would otherwise bear.

It should be noted that in order for this strategy to succeed a predator must be substantially stronger than the competition or be considered a dominant player in the market. When barriers to entry in the industry are high it also helps this strategy to be even more successful as the barriers will prevent new entrants to the market from replacing others driven out. This will therefore allow for supra competitive pricing to prevail for a sufficient period of time to more than make up for the short-term losses incurred by the predator.

Under the Fair Competition Act CAP 326C predatory pricing is considered anti-competitive. Section 16 (3) of the Act states

An enterprise abuses a dominant position if it impedes the maintenance or development of effective competition in a market and in particular, but without prejudice to the generality of the foregoing if it

(d) directly or indirectly imposes unfair purchase or selling prices that are excessive, unreasonable, discriminatory or predatory;

Where there is sufficient evidence of this practice by an enterprise, the Commission will commence an investigation and if found guilty of the practice the enterprise will be ordered to discontinue the practice, and the Commission may also ask that the court impose a substantial fine.

It is generally considered however, that predatory pricing cases are difficult to prove, as some argue that the drop in prices is not due to predatory pricing but rather to normal competition. It is further argued that the resulting reduction in prices to consumers should not be viewed as anti-competitive since the Fair Competition Act also seeks to provide benefits to consumers. There have also been cases where it was supported that the reduction in prices by the alleged predator was in actuality not predatory pricing. In Jamaica, the Fair Trading Commission’s investigation regarding Telstar Cable Ltd on Predatory Behaviour proved to be such a case. Using financial data, the Jamaica Fair Trading Commission ascertained that a reduction of Telstar’s revenue by 25% would not result in negative profits. It therefore concluded that the offer is not likely to have been below cost pricing. Furthermore, the duration of the offer was too short to have had any appreciable effect on competition.

It can be seen from this case that an alleged predatory pricing practice would need to be thoroughly investigated so as to be unbiased to both parties and so that it still results in ultimate benefits to the consumers. A predatory pricing scheme involves three steps: first, there is a period of artificially low prices; next, competitors fall out of the market; finally, the predatory company achieves monopoly pricing. If no monopoly pricing arises, then low prices remain.

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