Predatory Pricing

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  • #15780

    Consider even if a monopolist is able to absorb the loss from price cutting (while consumers benefit from low prices-which is what competition is supposed to achieve) for an extended period of time, when can they raise prices to recoup the losses they incurred in the predatory pricing scheme and get away with charging higher prices long enough for the predatory pricing scheme to be deemed a success?

    During the scheme competitors may be hurt as their profits and sales may drop. They may even be put out of business.(this is something that the law should not be concerned as competition helps the consumer by providing lower prices-if a company decides to try and gain market share and crowd out the competition by lowering prices, the consumer is helped)

    When the predatory pricing firm raises prices, surviving or new competitors can enter and undercut the monopolist’s prices. For this reason predatory pricing schemes are rarely tried and probably even if ever successful.

    What about the monopolies of those like Google (search/gmail) and Facebook(social media) that give away their products for free thereby preventing competition?

    These companies have become monopolies and the consumers “benefit” from their free services. How can companies compete with free? How can consumers benefit from this competition?

    Perhaps competitiors can pay consumers to use their products.
    http://blog.homegain.com/homegain/should-google-pay-its-users/

    #15781
    morin.greg
    Participant

    Google and Facebook aren’t actually monopolies. There are other competing search & mail products as well as competing social media. Yes they may be dominant in those areas, but technically to be a monopoly there would have to be NO competitors at all. But even this point is not so relevant. They provide these consumer services for free (mail, search, etc)… so even if they were monopolies it is a distinction without a difference, the reason monopolies are supposed to be “bad” is they can gouge the consumer… well you can’t beat free! There is no sense in which the consumer is harmed if provided something for free (assuming it is not injurious in some latent way of course). But even this is not relevant to the monopoly question. We’re evaluating the wrong part of what they provide. The question we need to ask is: What are they selling? In other words, what service do they provide that they actually receive money for? It’s not email or search or what have you, rather it is advertising. These companies are simply selling ad space. They give stuff away in order to increase eyes on their ads… it is simply a means to an end, to enhance what they can charge for ads in the market owing to the number of eyes on their ads. So the relevant question is this: Are Google and Facebook monopolistic within the market of selling ad space? I don’t know, perhaps on the internet they are the 800 pound gorillas… but in the wider market of ads they are not monopolistic. They have to compete with other ad venues such as: magazines, newspaper, TV, radio, billboards, etc. The price they can charge still has to be constrained by what other advertisers are charging in other media. It can vary, but only to a degree, it is not unrestrained, which is what a true monopoly would be.

    Also, the point has been made before that in a truly free market no monopoly can ever exist in the sense that even an apparent industry dominant company that is monopolistic within that industry, they are still competing with vendors of all the other goods in society. A monopolist gas company can’t charge $10,000/gallon of gas… at some point people just aren’t going to pay because they have to eat, they have to clothe themselves, they have to put a roof over their head. So the market still exerts restraint on prices even in these apparent monopolist situations. And of course if prices are high enough it will attract competitors who will drive prices down. It’s a process, it takes time. I think that is why people turn to government, they want a solution NOW… so with the swirl of a pen we can have a law and outlaw bad behavior X overnight… people don’t want to wait the few months or few years it might take the market to correct these sorts of things.

    #15782

    Great response.
    You are correct that the definition of the market place is often the key to making the determination of a monopoly. So for on line search advertising, Google may be dominant and may be deemed a monopoly but as you point out there are other markets for advertising which would reduce Google’s overall percentage of the advertising market.

    You are incorrect, however, that for a monopoly to exist it needs to have 100% market share. Courts look to whether the firm has monopoly power to raise prices in part based on market share. If the market share is 75% courts will deem the company a monopoly but that in and of it self does not violated the sherman act, the monopoly must also exhibit “anti-competitive behavior in the exercise of its monopoly position,

    To your point if online advertising were dominated by Google and there was no credible alternatives for price and volume, consumers would spend their advertising money offline.

    Eventually, as you also point out an online competitors to google would emerge and be able to charge less. The interesting point is how would these competitors emerge-in order to be able to provide advertising opportunities the competitor would need to build audience and would need to compete with the free services that google offers.

    That lead me to the blog post idea that perhaps a competitor might have to pay users to build audience to compete with Google’s free.

    #15783
    morin.greg
    Participant

    Well I was just considering the semantic definition of the word “monopoly” ie mono meaning one…thus strictly speaking it means only one supplier. The courts can label whatever they want as a monopoly but that doesn’t make it so…ie the whole notion of predatory pricing is a bit silly…they charge too low to benefit consumers and harm competitors…but why is this type of harm considered bad? I mean, the only reason they are able to sell at a loss (predatory pricing) is that they can fall back on their capital reserves (savings) to get through the period they make no money…so if instead they use this massive capital reserves to innovate and out compete the competition with better products, then that is considered ok – both represent a use of disproportionate resource (resources which were lawfully acquired). My point is that neither are wrong or bad and govt has no business getting involved.

    You ask the question: how would nascent competition emerge given the presence of dominant market presence? I would say the same way it has in the past. Look at Microsoft, they were once considered this impenetrable monopoly such that Doj was going to break them up. Now look where they are…they are still big but certainly not dominant, Apple, Google and others have made them somewhat irrelevant. Look at Kodak, once the king of the film industry, now they are in bankruptcy. But more to your direct question I might imagine an online advertising competitor would figure out some new approach to accessing consumers eyes, like Facebook, they took a totally different approach then google (speaking of which I just experimented with a Facebook ad run…their approach is genius, now I see why all these “likes” matter). So just because we cannot today in our armchairs imagine what that next angle might be (who knows maybe free movies with ads, or free music with ads) doesn’t mean it’s not possible such that we need the helping hand of, as Tom is fond of saying, our wise overlords. The issue though is as I mentioned in my first post is time, most do not want to wait the 10 or 20 years it might take the market to find solutions. But impatience is no justification for a loss of liberty.

    #15784

    I am with you on the notion that predatory pricing should be illegal is inane. If a company chooses to lower prices to gain market share or for whatever reason, that helps consumers and there is no reason for the government to get involved (indeed other than in cases of fraud or use of force/violence, the government should not be involved).

    I am more interested in the creative ways that competitors can learn how to compete against a dominant or “monopolist” company.

    Sometimes a company can compete on price by getting financing so they can improve their production, or they can create a better product, or service their product better and not have to compete on price.

    The inability of companies to compete shouldn’t mean that the dominant player who achieved that position through foresight, skill and execution should be tossed off its perch by government.

    The free market is the most democratic way of solving these issues.

    #15785
    morin.greg
    Participant

    You bring up a salient point that is often overlooked. Many people presume “capitalism” is bad because it is all about profit and profit can only be achieved by cutting costs (wages) or quality to the bone in order to undercut everyone else and sell the cheapest item possible. They overlook the fact that not everyone competes on price, they can also compete on quality and service. I think there is a saying that is something like this. “You can have it cheap, you can have it of high quality, you can have it quickly – pick any two”.

    These are the 3 basic areas of competition, price, quality, service (speed of service here). So since any given company can only delivery on two of those at the most, then a competitor can avoid direct competition by competing in two other arenas. So if say Walmart provides the cheap goods of high quality with crappy service, then you can provide expensive goods of high quality with high service, or cheap goods of low quality with high service… some consumers will be desirous of the different combinations. Now you might not put Walmart out of business, but given there are enough people that will pay more for better service Walmart will simply never capture those customers without changing their business model, and when they do, they’ll lose the customers that liked their former business model. This is a big reason Apple has done so well, maybe their products cost a bit more but the quality/experience is so much better there is a certain set of consumers that are willing to pay more for the experience.

    #15786

    Yes, price is not always the determining factor-think Starbucks-they overcharge for coffee. How does a coffee chain compete with Starbucks?-lowering prices might work but so far Starbuck is still the largest coffee chain.

    If Starbucks decided to “abuse” its dominant market position and cut its prices in half, who would/should complain?

    #15787
    kwgeralds
    Member

    Nice thread.

    I have a burning, and simple, question:

    If there is no evidence of predatory pricing by a company in American history… where did Anti-Trust legislation get its support? (I’ve read Woods 33 questions and IPC Guide to US History)

    What companies did what to offend the public and government to the point that considerable time and effort was used to harass and break apart companies?

    I find it difficult to believe the government did it just because or just for votes. Some specific things must have set off the crusade.

    I am currently teaching a high school US history course and want to properly explain the motivation behind the laws.

    #15788
    kwgeralds
    Member

    I think I found my answer (please let me know how right or wrong I am);

    The Panic of 1873 (which was caused by the burst of the government created Railroad Bubble) caused a depression that freaked everyone out. During that time political and social movements gained influence in opposition to the rooted corporatism responsible for the bubble – Communism, socialism, populism, anarchy and progressivism.

    #15789
    #15790
    derosa8
    Member

    How about the claim that the Diamond Mining company is a monopoly? I don’t remember the name of the industry, but I think Milton Friedman even used to say this was one example of true monopoly.

    And a widespread common objection (and defense of anti-trust laws) is the fact that many industries have barriers to entry. That is, it takes an awful lot to whip up something to even compete with them so businesses won’t try. How would you guys answer that?

    #15791
    woods
    Participant

    John, on diamonds, see this: http://mises.org/econsense/ch91.asp
    And this: http://mises.org/daily/4967/

    On the origins of antitrust: http://www.cato.org/pubs/journal/cj9n3/cj9n3-13.pdf

    On barriers to entry, what barriers? If those barriers are imposed by government, then that’s your problem. If you just mean it costs a lot to start an auto plant, that’s something different. George Reisman deals with this in this article: http://mises.org/freemarket_detail.aspx?control=384

    #15792

    kwgeralds: “If there is no evidence of predatory pricing by a company in American history… where did Anti-Trust legislation get its support?”

    If Rothbard is right, virtually every anti-cartelization/anti-monopoly measure/policy/regulation/law was actually intended to do the opposite. He explains this theory in a series of elections collected:

    http://mises.org/media.aspx?action=category&ID=217
    (these lectures are in reverse order; the first one is at the bottom and you work your way up).

    The problem for would-be cartel-formers & would-be monopolists starts with what game-theorists would call a “Prisoner’s Dilemma” – the cartel as a whole could, in theory, prosper more if they all stuck to the agreement, but individually each member of a cartel has an incentive to “defect” – to cheat on the agreement to gain more market share. But when they all do that, the cartel falls apart. So they need something to force all the members to stick to the agreement.

    To solve that, they first turned to trust-building: conglomeration. If they were all part of the same corporation (Trust), then they wouldn’t defect from the agreement. But open entry foiled that. So they needed something even stronger, and for that they turned to the State.

    Rothbard’s argument, leaning on the Kolko book (that Woods also recommends but which I haven’t read yet – I ordered it yesterday) is that virtually every regulation sold to the public as preventing combinations has in fact – in intended fact – promoted them. (We see that down to today in modern legislation like Sarb-Ox and Frank-Dodd, both of which were sold to the public as “protecting the little guy” but which in fact make it more difficult for small firms to operate, for new startups to get into the market, and thus intrench large incumbent firms).

    Rothbard also argues that the idea of “regulatory capture,” while superficially plausible, is actually incorrect, because there was no “capture” – these regulations were always, right from the start, written by one set of businessmen to screw another set (their competitors, potential & actual); this argument was plausible to me even though I haven’t read the books he mentions in this series of lectures, because of my prior knowledge of how the New Deal’s regulations were written.

    Anyhow, if you have time for it, I highly recommend those Rothbard lectures – they’re eye-popping. O.o

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