Predatory pricing involves substantially reducing the price of a product or service with the intention or effect of undercutting competition and preventing new businesses from entering the market. The Australian Competition & Consumer Commision (ACCC), Australia’s consumer watchdog, has recognised predatory pricing as an illegal misuse of market power.
So can prices be too low? In short, the answer is yes, and it could be against the law in some circumstances.
Having competitive prices in a tightly contested market is a key way to ensure that your business sales continue to grow and to attract a returning customer base. Most of the time, this is a normal part of the competitive process which is beneficial both for growing businesses and consumers who enjoy lower pricing.
Whether you’re a small business and feel that you’ve been damaged by predatory pricing or you simply want to know more about the best way to competitively price your products and services, we’ve set out some of the important things about predatory pricing to watch out for.
How Does Predatory Pricing Occur?
Predatory pricing occurs when a business with a substantial degree of market power sets prices at a sufficiently low level over a sustained period of time.
However, the ACCC recognises that businesses are free to set prices or discount goods and services how they see fit. This can include where goods or services are priced below their cost.
So when does it become illegal? It’s when businesses lower the prices of their goods or services for the purpose of, or with the effect or likely effect of, damaging or eliminating competition in the market. It is this anti-competitive behaviour which is the central element of predatory pricing.
Aberdeen Journals, a United Kingdom newspaper group, had a dominant position in the market for the supply of advertising space in local newspapers. Between 1996 and 2000, it lowered the price of advertising on its newspaper to a below-cost price so that it was incurring a loss.
In a ‘persistent campaign of predatory conduct’, Aberdeen Journals was found to have used its dominant market position to attempt to drive out its sole direct competitor in the market, a local independent newspaper.
In 2001, Aberdeen Journals was fined £1.3 million by the Office of Fair Trading for predatory pricing.
What Are The Negative Effects Of Predatory Pricing?
The ACCC has identified three ways in which predatory pricing can damage a market:
- Forcing other smaller competitors to exit the market;
- Punishing or disciplining other competitors for competing aggressively; or
- Creating barriers for new potential competitors seeking to enter the market.
Predatory pricing can have a significant and widespread effect upon both the competition in a market and its consumers. It may appear to be a positive thing for consumers, who can enjoy ultra-low prices. However, these ultra-low prices will often result in losses in the short to medium term for a business engaging in predatory pricing.
While a business with a substantial degree of market power may be able to weather the initial losses from low prices, smaller competitors may be forced to withdraw from a market. This is because they may not be able to match this low price with a smaller market share. This can also deter potential competitors from entering a market, particularly where those new entrants cannot afford to compete or viably carry on a business.
This means that once the competition has been damaged in a market and potential rivals have been blocked out, the market is left with less competitors and, sometimes, the predatory business will be left with a monopolistic power over the market. This leaves it in an unconstrained position to exploit consumers, such as by raising prices to recover the losses from predatory prices.
What Is The Law On Predatory Pricing?
Although predatory pricing is not specifically mentioned in the law, it is considered to be a misuse of market power. This is captured under section 46 of the Competition and Consumer Act 2010 (CCA), a national law which governs all things related to businesses, customers and anti-competitive behaviour more broadly.
This law provides that a business with a substantial degree of power in a market cannot engage in conduct for the purpose or intention of substantially lessening the competition in a market. Further, even if anti-competitive behaviour wasn’t its intention, if a business’ pricing had this effect or was likely to have this effect, it is also an illegal misuse of market power.
A business with a substantial degree of market power is able to insulate itself well from competition. It will likely be able to act independently of market forces, such as competition, suppliers or customers. Other factors determining a business’ market power may include its financial strength, market share and the ease with which it restricts competition.
How Should I Price My Products Instead?
With all of this in mind, pricing your goods and services may feel like a daunting process. Certainly, there can be serious consequences for businesses which disregard the laws and regulations around price-setting.
The Recommended Retail Price (RRP) is generally a good starting point in price-setting. This is a recommended price which is provided by a supplier to a retailer. You may then want to calculate the costs for producing or delivering your product or service.
When coming to a figure for your price, you will need to think about what kind of profit you are looking to make on your goods or services. Take into account your positioning in the market, such as whether your business sells high-end products. You will also need to factor in how your competitors price their rival products in your strategy.
Aside from laws against predatory pricing, you will also need to make sure that you comply with additional regulations in competition and consumer law.
For example, if you use comparative pricing strategies to compare the current discounted price of a product to a previous one, you will be breaching the Australian Consumer Law if you are untruthful or misleading. We’ve talked about some of these other legal regulations which affect pricing in more detail here: Recommended Retail Price: How Do You Know If Your Price Is Right?
Predatory pricing will necessarily involve an offending business with a large market share and good financial strength. This business must have sufficiently lowered its prices either for the purpose of harming competitors or with the effect or likely effect of harming competitors.
But it is important to remember that businesses are generally free to set their prices how they wish, even if this involves operating with a loss. The act of lowering prices itself will not necessarily always be a misuse of market power, even if a business has a large market share.
Whether the law has been broken or not will depend on the anti-competitive purpose or effect of the conduct. Other additional factors, such as how long the goods or services have been sold at a low cost (a sustained period is more likely to be predatory) and how much market power the business possesses will also be relevant.
While it often seems fairly harmless and normal for a business to lower the prices of goods and services, it could be predatory pricing if the purpose or effect of this is to damage competition.
If you feel that you’ve been damaged by predatory pricing or if you want to know more about the regulations that impact your pricing, we’re here to help! You can reach out to our team for a free, no-obligations chat at firstname.lastname@example.org or 1800 730 617.
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