PREDATORY PRICING A SLOW POISON FOR MSME? -By Kanish Malhotra

Author- Advocate Kanish Malhotra
Sr. Editor – Industrial Front

A pricing technique known as predatory pricing involves setting a price for a limited time that is lower than the cost of manufacturing. The goal of this tactic is to harm the industry’s competitors and bring in greater profits over the long term. It’s possible that predatory pricing is a tactic that’s used to strengthen market dominance. It is important to make a distinction in predatory pricing and ratings that favour the customer.

There is a difference between rating an item to satisfy customers and rating an item to defeat the competition; the purpose of the item in predatory rating is to hinder competition. The rating concept may also be used to the removal of a competition, the restriction of a prospective entrant, or the reduction of the value associated with the acquisition of a competition.

This method of manipulating prices of the product or service was done with the idea of becoming a monopolistic player and with the goal of eradicating all of the other competitors from the market.  The company must have had the intention to recoup or recuperate the losses sustained as a result of the decrease of the prices at a later time by increasing the prices once again after excluding the rivals from the market or preventing new entrants from entering the market.

The pricing strategy known as predatory pricing is unique to the market and can only be utilized by a select group of market players. Therefore, in situations of predatory pricing, the real analysis is carried out by assessing the sufficiency of the market structure and the position of the claimed player within that market. This is done in order to determine whether or not the claimed participant engaged in predatory pricing. When it comes to circumstances involving predatory pricing, the following are the components that are significant:

Market dominance achieved by concentration: The ratio of the total size of all players in a market to the total number of participants in that market is the definition of market concentration.
One of the ways that market domination may be obtained is by the creation of a demand for higher prices through the use of predatory pricing. In highly competitive markets, acquiring market domination through the use of dishonest or deceptive practices is, practically speaking, an urban legend. Combining forces is the strategy that is most frequently recommended for achieving dominance in highly competitive markets; however, this strategy cannot be implemented in the vast majority of situations for the straightforward reason that competitors are unlikely to be amenable to the idea of working together. As a consequence of this, predatory pricing, despite the fact that it is against the law, is encouraged over mergers, and recognizing predatory pricing is a challenging problem to solve.

In addition to being a characteristic of concentrated markets, entry barriers can also be found in other types of markets. Alternately, in situations where there are no barriers to entry, the prospect of entering the market or the influence of a large number of new entrants might function as a disincentive to the development of predatory pricing practises. Because concentrated markets smother competition, they cannot coexist with any kind of anticompetitive activity and must be avoided at all costs.

Every single predatory pricing system is devised with the intention of absorbing the sales of rival businesses that have a surplus of available capacity. As a result of the predator’s product being more affordable, there is a concurrent increase in demand for the predator’s product, while there is a concurrent drop in demand for the rivals’ goods. Due to the absence of extra capacity, the predator wouldn’t be able to take on the sales that the expected rivalry would produce. In addition, if there is no new production, there is very little pressure placed on the rivals, which makes it easier for them to continue existing.

Deep-pocketed: Only businesses that have significant financial reserves will have any chance of being successful while engaging in predatory pricing. “In turn, companies that have large market shares and relative efficiencies and competitive costs or other advantages over their competitors or operations in independent relative markets may have financial reserves in their possession.Alternatively, these companies may have operations in multiple relative markets.

A company that operates in multiple markets would have an easier time gaining access to funds that are derived from the profits of other markets in which it operates successfully “As a result of the fact that the predator will sustain losses over a considerable amount of time during the initial phase of a predatory scheme, i.e. when selling at artificially low prices, it is abundantly clear that the predator’s financial resources must be greater than those of his rival, and the latter may not be able to withstand losses to the same extent that the predator can, which is why the small scale enterprises have suffered loss and large scale MNCs hide behind the name of competition and easily get away with the crime of Predatory Pricing. Read More Business News on our website.