Glossary of competition terms

This Glossary was prepared by DG COMP and the OECD for non-competition specialists. Each term is enriched with references of national case laws from the e-Competitions Bulletin. (© European Union - © OECD)

Predatory Pricing

A (deliberate) strategy, usually by a dominant firm, of driving competitors out of the market by setting prices below production costs. If the predator succeeds in driving existing competitors out of the market and in deterring future entry of new firms, he can subsequently raise prices and earn higher profits. Predatory pricing by dominant firms is prohibited by EU competition law as abuse of a dominant position. Prices set below average variable costs can be presumed to be predatory, because they have no other economic rationale than to eliminate competitors, since it would otherwise be more rational not to produce and sell a product that cannot be priced above average variable cost. Where prices are set below average total (but above variable) costs, some additional elements proving the predator’s intention need to be established in order to qualify them as predatory, given that other commercial considerations, like a need to clear stocks, may lie at the heart of the pricing policy.

© European Commission ]

A deliberate strategy, usually by a dominant firm, of driving competitors out of the market by setting very low prices or selling below the firm’s incremental costs of producing the output (often equated for practical purposes with average variable costs). Once the predator has successfully driven out existing competitors and deterred entry of new firms, it can raise prices and earn higher profits.

The economic literature on the rationality and effectiveness of predatory pricing is in a state of flux. Many economists have questioned the rationality of predatory pricing on grounds that: it can be at least as costly to the predator as to the victim; targets of predation are not easily driven out, assuming relatively efficient capital markets; and entry or re-entry of firms in the absence of barriers reduces the predator’s chances of recouping losses incurred during the period of predation.

However, other economists have suggested that price predation might be feasible if it is undertaken to "soften" up rivals for future acquisition, or if potential targets of predation or their sources of capital have less information about costs and market demand than the predator. (...)