Rockwell writes:
The fantasy is this: the big guy lowers prices to undercut the competition and then comes roaring back with high prices once he has the market monopolized. This is a nice fantasy and it might make a nice board game, but it has nothing to do with the real world.
Was there ever a case of this happening? Where did the statists came up with the idea?
I can certainly imagine the scenario: drive competitors out of business, then raise prices until a new competitor arrives and then drive that one out of business and so on, but is there evidence of this? Is it an economically viable strategy?
It seems to me that if anything, it hurts the brand so companies shouldn't try to play with fire for a few dollars more if they know what's good for them.
Indeed, these statists seem to assume at this point that the only variable is price. It seems when they need to critisize advertising, they focus on brands and forget prices, when they talk about businesses using price strategies to monopolise markets, they forget about brands... They must after all, their models would not work if they looked at the big picture.
I think it's possible that this has been used (no specific examples here) but this is not a rinse and repeat type of thing, as you correctly point out, the company would ruin their reputation, and the next time they lower their prices, they will have already lost consumer confidence.
xSFx: Rockwell writes: The fantasy is this: the big guy lowers prices to undercut the competition and then comes roaring back with high prices once he has the market monopolized. This is a nice fantasy and it might make a nice board game, but it has nothing to do with the real world.http://mises.org/story/226 Was there ever a case of this happening? Where did the statists came up with the idea? I can certainly imagine the scenario: drive competitors out of business, then raise prices until a new competitor arrives and then drive that one out of business and so on, but is there evidence of this? Is it an economically viable strategy? It seems to me that if anything, it hurts the brand so companies shouldn't try to play with fire for a few dollars more if they know what's good for them.
As far as I know there aren't any examples of this strategy actually working in the marketplace. In my opinion the believers in such a concept mistakenly think that companies that go bankrupt are completely removed from competition.
If company A lowers prices below cost and can outlast company B and cause company B to go out of business, company A will have to charge super-normal prices to recoup the losses from the "predatory pricing" strategy. But when company B goes out of business the factory and personel with expertise don't simply fade into the dust, they can be purchased and could easily compete with company A if it is charging prices that are too high.
Also the whole story of predatory pricing leaves out potential competitors and only takes into account current competitors. If I knew that company A was going to raise prices after company B went out of business I would open company C and would easily be able to out compete company A, because they will have to charge very high prices because of all the money they lost putting company B out of business. In other words the strategy simply would not work and would result in the company that tries it losing market share.
Predatory pricing is simply an irrational strategy and will probably never work.
"I cannot prove, but am prepared to affirm, that if you take care of clarity in reasoning, most good causes will take care of themselves, while some bad ones are taken care of as a matter of course." -Anthony de Jasay
It has limited function, but it does work - but only in retail outlets.
It was used to put independent video rental stores out of the competition by both Blockbuster and Hollywood video.
I doubt it would work in a less location-oriented business, though.
Danno
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The closest example to this I can think of is $0.01 flights??? Advertising 1 cent flights in the EU is now apparently illigal...even if that is the actual amount the airline receives. Don't think that any airline has ever gone out of business because of it.
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The problem is that, after bankrupting smaller competitors, State regulations restrict new market participants. Bankrupting competitors via predatory pricing *IS* profitable if government regulations make it very hard for new businesses to be profitably formed.
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Danno: It has limited function, but it does work - but only in retail outlets. It was used to put independent video rental stores out of the competition by both Blockbuster and Hollywood video. I doubt it would work in a less location-oriented business, though. Danno
Did Blockbuster or Holywood Video raise prices after the other video rental stores went out of business or did they simply charge lower rates because they had lower costs? If the latter, it isn't a case predatory pricing.
Solid_Choke: Did Blockbuster or Holywood Video raise prices after the other video rental stores went out of business or did they simply charge lower rates because they had lower costs? If the latter, it isn't a case predatory pricing.
While there were independent video rental stores in the neighborhood (and there were several), it cost a mere $1.99 to rent a new release at Blockbuster, 0.99 to rent an older movie - about 65% of the rates charged by the independents. Once the neighborhood was free of competition, the rates eased upward, in small increments, but steadily - Now, it's $5 to rent a new release, $3 to rent an older movie. Adjusting for inflation, the rates today are probably a bit higher than the independent shops were charging 10 years ago, before they went out of business - but they're all gone.
I made out pretty well as the independents went under - much of my movie collection was obtained at the clearance sales.
I'll cheerfully admit that this is an economic oddity - for predatory pricing to work, the location of the business must be an important factor to the business. Now, I understand that Netflix, by being location-independent, has Blockbuster and Hollywood considerably worried - they've got the "but I want the movie tonight" business, but business is down considerably for both of them. Blockbuster entered the movies-by-mail competition, using their neighborhood locations to add a service that Netflix couldn't - free rentals at the storefront to go along with the mail-order movies. This, of course, resulted in the storefronts losing business to the mail-order segment, and Blockbuster discovered that they'd been drinking their own milkshake. Thier prices for the mail-and-storefront service jumped, and they lost customers.
It's been interesting to watch as a movie buff - as a lesson in economics, it's notable.
I'm told that Walmart has done the same thing in smaller communities - underselling the independent competition until they're the only source locally for many items, but I haven't heard reliable reports that they've raised prices in areas in which they have no nearby competition, so video rental may be the only instance in which predatory pricing is viable.
Danno, off to make popcorn
A quick look at wikipedia shows some alleged examples. It's particularly interesting that some of these attempts are obvious failures like the Irish airline one. From a theoretical standpoint, I think that predatory pricing without lots of state intervention is unlikely, but possible. From wiki:
Netscape had been selling their web browser for approximately $30 retail. A new competitor called Microsoft entered the market by introducingInternet Explorer at $0 retail, thus selling the software below development cost. This action quickly drove Netscape's browser market share to almost-zero, and the company was forced to liquidate to AOL. It is disputed as to whether this was really a case of predatory pricing, because Microsoft never raised the price of Internet Explorer even after achieving monopolistic status in the web browser market. This action eventually brought the scrutiny of the U.S. Justice Department in an anti-trust case.[citation needed] France Telecom/Wanadoo—The European Court of Justice judged that Wanadoo (Now Orange Internet France) charged less than cost in order to gain a lead in the French broadband market. They have been ordered to pay a fine of €10.35m, although this can still be contested.[citation needed] During the late 1980’s and early 1990’s, Irish national airline Aer Lingus attempted to predatorily price out new Irish entrant Ryanair, using up a huge amount of their cash reserves in the process. This severely backfired with Ryanair surviving, becoming highly cost efficient and expanding to become one of the largest airlines in Europe. Aer Lingus have since experienced a number of near bankruptcies in part due to being unable to compete with Ryanair. In 2006 Ryanair launched a takeover attempt of Aer Lingus.[citation needed] According to a September 29, 2007 Associated Press article, a law in Minnesota forced Wal-Mart to increase its price for a one month supply of the prescription birth control pill Tri-Sprintec from $9.00 to $26.88. [1] According to a September 9, 2000 article in the New York Times, the government in Germany ordered Wal-Mart to increase its prices. [2] According to a January 14, 2008 article in the International Herald Tribune, the government in France ordered amazon.com to stop offering free shipping to its customers, because it was in violation of France's predatory pricing laws. After Amazon.com refused the government's order, the government proceeded to fine amazon.com €1,000 per day. Amazon continued to pay the daily fine, instead of ending its policy of offering free shipping. [3] According to a March 31, 2004 opinion column by George Mason University economics professor Walter E. Williams, 13 of the 50 states in the United States have minimum gasoline prices. [4]
I don't see how location has to do with it. First, the costs are the same. Second, there are ways to combat it (for instance, I saw in Spain movie rental boxes very much like ATMs -- people would put a card, pay, get the movie... This can be located pretty much everywhere...). I personally am a customer of Blockbuster because they are open until late and another store I went before wanted me to give them a photocopy of my ID-card to register -- I will happily pay more for my privacy, thx. In general, the BlockBusters stores are much nicers, having movies for actual sale, quick-drop and candy. :P
Anyway, if there was some case of predatory thing here, it may have to do with copyright. I mean, if there was only one statist country producing most of the oil, then they would have a lot of control over the pumps around the world. Anyway, there are a few movie producers, so if one doesn't want to do business with you, the others might be willing to drop their prices a bit for you, since it's like you're giving them exclusivity. Certainely, they would be very stupid to cut you off as well.
But I don't see how having a retailer helps them all that much. Maybe they guessed that by having a common channel, the cartel they were conspiring to form would be stronger, more unite.
I tend to think that BlockBuster success has a lot to do with McDonald's, Pizza Hut and the like. Franchises are just a superior business model. I know, for instance, McDonalds only owns something like 10% of their restaurants. They motivate and teach entrepeuners and then get part of the sales, while providing a lot of infrastructure. This semi-decentralized model with a strong backing behind works very well, especially in large scale.
People in these formums seem to have a disdain for big business, as it they were unnatural, but certainely here people prefer to do business and work for big businesses. Generally small shops are a family business and the attendment can sometimes be unpleasent and unhelpful, while bigger businesses use part-time workers, generally younger people, etc who tend to be way more helpful, peraphs because they don't work so hard.
I didn't use to rent movies before BlockBuster, so I can't say if they hi-jacked prices here as well. It is much cheaper to do a rental than going to the cinema though. By the way, BlockBuster is no profits panacea, one store closed in a city nearby here, so I guess they don't work with that high margins because they allowed this shop to close after years of being operating.
Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty
majevska:Netscape had been selling their web browser for approximately $30 retail. A new competitor called Microsoft entered the market by introducingInternet Explorer at $0 retail, thus selling the software below development cost.
About this one, Netscape should blame itself here. First, their browser was very good, but they let it stale after the 4th release; eventually jumping to a 6th version after a few years. They were making little from the browser suite itself, where the big bucks where is on the completementary server technology, and this is where they failed. Besides starting to have competition from Apache, which is developed by sysadmins for free, the ego of the management was inflated as the company's market value was overvalued a few times, as was the case with several other IT companies, so they were actually rejecting contracts. Here's a few comments from an IT website where a few people tell their experiences from interactions with Netscape.
Anyway, the wiki quote I cite is patently false. Netscape was selling their web browser at $30?? It was available for free to everyone as well. It was the server stuff they sold. They did made some money with the browser because Yahoo paid them to be the default page, and they sold the default bookmarks slots and stuff I think. But this is pennies compared with what they were making with the servers. Furthermore, I dislike how they only mention the web browser when they had a full web client suite (IRC, mail, etc) -- even if IE tried to steal their base browser's base, they had some competitive advantage with the rest of the tools (not to mention the browser itself was much more advanced in 4th version.)
BlackSheep: I don't see how location has to do with it. First, the costs are the same. Second, there are ways to combat it (for instance, I saw in Spain movie rental boxes very much like ATMs -- people would put a card, pay, get the movie... This can be located pretty much everywhere...). I personally am a customer of Blockbuster because they are open until late and another store I went before wanted me to give them a photocopy of my ID-card to register -- I will happily pay more for my privacy, thx. In general, the BlockBusters stores are much nicers, having movies for actual sale, quick-drop and candy. :P
In the retail movie rental business, location is remarkably important. People will travel only so far to rent a movie, and a given area will only support a given number of rental outlets. If a large business places enough outlets in a city to have an outlet within reach of most people, and runs at a loss for long enough to put the competition out of business, they can then run prices up high enough to make up the loss they started with - and predatory pricing has worked.
Movie sales are much less location-dependent - I bought my last movie from Amazon, for that matter - but they don't want me to deliver it back to them. Netflix took a large chunk of the business with a new model - the mail delivery/return of movies, with a subscription rather than a per-movie fee - the industry is changing. But for the "pick up a movie, pay a rental fee, and return the movie in a few days" business, you're only going to be competing with other similar businesses that are close by.
Blockbuster stores are not necessarily bad - but they and Hollywood proved that, in a location-important retail business, predatory pricing can be a useful tactic.
I've seen the movie-rental vending machines here in Minneapolis - one set run by Hollywood, another by a company whose name I misremember. I haven't noticed any lines to use them, or people using them at all, for that matter - but haven't looked at them closely enough to have an informed opinion on how well they're doing. Mostly, their selection isn't wide enough to interest me.
I'm not sure what you're driving at here, but I expect that you've seen something of the partnership between Blockbuster and Wienstien movies - they show up at Blockbuster as an exclusive, and Blockbuster recommends them strongly. I'm not sure this is doing either one much good or harm, or hurting the customer particularly.
Economies of scale do, indeed, provide an advantage. I'm not that fond of the franchise business model, myself - mostly because the quality seems to be a bit lower than non-franchise establishments, particularly in food service. But there are some glittering exceptions (Quizno's, for example) - and I've got no particular axe to grind against franchises or large operations, either.
My experience has been the opposite. In an independent operation, there's generally a considerable amount of contact between the owner and the front-line sales staff, and I generally get pretty good service. Then again, I get pretty good service at Target and Walmart, too - so not all big operations suffer on the customer service end. I expect that customer service is occasionally poor at independent stores, too - but I don't expect them to be there for long.
It's my understanding that Blockbuster's early attempts to compete with Netflix for the mail-order rental business cost them quite a bit, and there were some vicious policy battles at high levels - there's been remarkable turnover in store management in my area, and I've heard a fair number of complaints from employees there, quite a few from confusion about goals and policies at higher levels. That may have improved - my information is almost a year old now.
This is, however, pretty much irrelevant to a discussion of predatory pricing, which is where this started. If you didn't rent movies before Blockbuster moved into your area, find someone who did, and ask them if they recall the demise of their favorite neighborhood video rental shop - their memories may confirm what I've reported here.
Danno, movie business insider to the stars...
Danno:In the retail movie rental business, location is remarkably important. People will travel only so far to rent a movie, and a given area will only support a given number of rental outlets.
Sure, I have read StarBucks has made it big, by carefully calculating all good locations. There is none in this country, but I know they are popular elsewhere. But it sounds weird how nobody invested in all those cities in the good locations. A company cares about the margins, not the costs of the initial investment. So it sounds as if Hollywood producers might have cut the prices for the movies for those stores.
Copyright is certainely a distortion of the market, because you can't really offer a product of similar value -- people tend to have an idea on what they want to watch a lot of times, or get frustrated the few times they might want to and you don't have it. I'm not sure if it's that of a good idea to get rid of copyright like some folks here, but certainely producers should set the same licensing for the same cost for everybody I think.
Danno:This is, however, pretty much irrelevant to a discussion of predatory pricing, which is where this started. If you didn't rent movies before Blockbuster moved into your area, find someone who did, and ask them if they recall the demise of their favorite neighborhood video rental shop - their memories may confirm what I've reported here.
Okay, Blockbuster is recently young here though. This is Portugal, we had a protectionist fascist until 3 decades ago, we had terrible socialist attempts that actually resulted in hunger after democracy, we lost our colonies. We have been prospering since we entered the Union, but some europe eastern countries that had actual communism have more american companies than we do. ;) Those wealth in leisure is pretty recent here.
I should preface of course that I believe predatory pricing should be legal and any law to stop it is an absurd idea.
I think it's possible but that any firm to try it will face enormous risks (see my examples of failed predatory pricing above) and thus it won't be too attractive to try. A company will have to operate at a loss for a while, so there are several reasons why this could fail: the "predator" may underestimate its competitors' ability to simultaneously operate at a loss/temporarily sell at an exorbitant price (compared to predator) due to customer loyalty and other factors; its competitors may find ways to shut down only temporarily; and new entrepreneurs might be able to enter into competition once the period of predatory pricing is over. I'm sure there probably are other factors as well. Any potential "predator" will have to take into account that their firm will operate at a loss and the subsequent gains through lack of competition may well not make up for the loss.
What Danno says about Blockbuster sounds plausible and could happen in certain areas but certainly didn't happen in my area. There have been several independent video stores open for as long as I can remember here so either they decided not to try it or it failed.
majevska: I should preface of course that I believe predatory pricing should be legal and any law to stop it is an absurd idea.
Just as any law against monopoly is absurd - unnecessary, and more prone to causing problems than solving them.
I would expect that, for it to work, you'd need a fairly large and dense population center - enough customers after the competition has gone out of business to make the early losses recoverable.
It's entirely possible that Blockbuster and Hollywood video both tried it, looked at the other, and decided that it wasn't a viable plan any more. I do recall recall the vengeful glee of the manager of an independent, as I was stocking up at their "going out of business" sale, when she was talking about the new Hollywood that had opened in competition with the Blockbusters - she hoped that they'd low-price each other into the ground, and the independents would make a comeback. It did not happen that way, of course - but the competition between the two may have been a factor in the decision to try it (or not) elsewhere.
While I'm not particularly a fan of the big-box stores (most of the local, independent hardware stores have also closed their doors), I understand that as a consumer, the trade-off was between knowledgable service and higher prices at the small shops, versus lower prices without a knowledge base at the larger stores. I miss my neighborhood hardware store, but I like lower prices, and prefer capitalism to any other system available - so I'll deal with the tradeoffs.
Danno, who can't find an "Adult" section at Blockbuster, and appreciates the Internet.
Predatory Pricing is typically the lament of the bad businessman.
I have and will continue to use low margins to undercut competitors on price, until I can establish a clientele loyal to superior service. It's simply a winning strategy. I've done it as the underdog several times, it always works. But when the underdog does it, they call that competition, when the established business does it, they (crybabies) don't call it competition, they call it "predatory pricing".
Lots of great business inspiration to be found in Art of War.
Um, "they undercut my price" isn't the same as predatory pricing - nor do I recall anyone conflating the two. Though I've heard a fair bit of complaint about price undercutting, the video rental thing is the only time I've heard a businessperson complain about predatory pricing.
Much of my business is custom leatherwork - and my prices are undercut constantly. As a matter of fact, when a client asks me for something I know they can buy off-the-rack elsewhere, I tell them where to go to find it, far cheaper than I'll work for. When they want something they can't get anywhere else, they're generally pretty cheerful about paying my prices - they like the quality of my work. Not only can I not compete with the inexpensive labor of Korea or Mexico - I don't want to. Production-line work just isn't that much fun, and at those prices, it's not notably profitable.
I did think of another example of something similar to predatory pricing, though it wasn't, quite. In my youth, there would occasionally be a gasoline price war, in which two nearby gasoline vendors would drop their prices to absurd levels. Stations A and B would generally have remarkably similar prices (back then, about US$.249 per gallon was typical), but Station A would drop the price by a penny to attract more business. Station B would then drop their price by 2 pennies, to have the best price and most customers. Rarely, this would turn into a competition that brought the per-gallon price at those two locations to well under the wholesale cost - it looked like a pride/anger thing between the two station owners. The lowest price I can recall seeing, in about 1972, was US$.089 - and the line of customers waiting for gasoline at that price was awe-inspiring.
Speaking as a consumer, it's truly a pity that the practice died out.
Danno, avoidin' honest work - there's a decidedly tricky project on the workbench, and I'm not lookin' forward to the next step.
Danno:Um, "they undercut my price" isn't the same as predatory pricing - nor do I recall anyone conflating the two. Though I've heard a fair bit of complaint about price undercutting, the video rental thing is the only time I've heard a businessperson complain about predatory pricing.
I was making a statement to the topic in general, not a post in particular.
I wasn't feeling picked upon - just commenting that while I've been talkin' business for years, I've heard very few complaints about 'Predatory Pricing' from businesspeople. Mostly, I hear it from consumers, complaining about Walmart - which is clearly their error. I do hear "I can't compete with their prices", and come to think of it, I say that myself - but then, I don't often try to compete on a price basis.
Other evidence to the contrary, I'm not really that thin-skinned - and I certainly wasn't taking offense, or believing it had been offered.
Danno, still avoiding that stitching job - sole leather is evil stuff. Work is, truly, the curse of the drinking class.
There is nothing wrong with "predatory pricing". If a compnay is selling its product below production cost, then the consumer gains by is getting something for free. Eventually the competitors on the margin will go bust, and if all competitors went bust.. the company would be able to make the price higher again.. if it made it real high, new competitors would enter the market again.. to get a piece of the profitable market. And the company would have to lower prices again below cost of production.. and again the consumer would benifit. You see, it just does not make business sense to make a loss selling below producton cost just to be able to make profit later.. because the company would always be atacked by new competitors undercutting its high prices, there would always be another company that had to be starved to death.. and in the meantime consumers would be getting stuff for free. Noone ever got rich giving stuff away for free.. and if some company is giving away something for free.. we as consumers should be thankful that this company is so foolish.
Cheers
BlackSheep:Anyway, the wiki quote I cite is patently false. Netscape was selling their web browser at $30?? It was available for free to everyone as well.
Only starting with version 4. I purchased Netscape 2.1 on 3.5" floppies at Best Buy in 1996, and then 2 months later I purchased 3.0 on CD at Best Buy.
I heard someone say that in their town a large department store started selling gasoline at a 'predatory price', not to try to eventually make a profit on gasoline, but to bring in customers who would then do the rest of their shopping there. Is this a way around the normal logic used against 'predatory pricing?' They aren't doing it to be able to eventually charge monopoly prices on gasoline--presumable they intend to perpetually lose money on the gasoline sales, but make up for it in the resulting larger market share for all of the other goods they sell.
The person who told me this said his town passed an ordinance blocking the store from continuing this strategy.
What do you think--is this a workable strategy?
Joel: [...] They aren't doing it to be able to eventually charge monopoly prices on gasoline--presumable they intend to perpetually lose money on the gasoline sales, but make up for it in the resulting larger market share for all of the other goods they sell.
[...] They aren't doing it to be able to eventually charge monopoly prices on gasoline--presumable they intend to perpetually lose money on the gasoline sales, but make up for it in the resulting larger market share for all of the other goods they sell.
That's not predatory pricing - that's what they call a _loss leader_. It's "get them in here with the cheap price on this, and make the money back on everything else that they buy".
The person who told me this said his town passed an ordinance blocking the store from continuing this strategy. What do you think--is this a workable strategy?
Based on how many times I've seen this strategy, I'd have to guess that it's workable - every supermarket I know uses this to bring customers into the door.
It is not, unless the goal is to burn the competition out of business, predatory pricing.