![]() ![]() In the long term, customers suffer from higher prices and the now near-monopoly company is able to reap the profits of price appreciation. As a customer’s willingness to pay declines as prices increase, the price appreciation works most effectively on inelastic goods. Long-Term EffectsĪfter competitors are driven out, the remaining firm is able to raise prices and recover lost profits. The company that survives the price war and remains in the market is able to reap long-term rewards of increased market share, although it is not likely that it will be able to establish a monopoly in the industry. In the short term, predatory pricing creates a buyer’s market, where customers are able to “shop around” and usually obtain goods at a lower price.įor companies, profitability declines as competitors actively try to undercut each other’s prices and divert traffic to their own business. ![]() Predatory pricing in the short term benefits customers but harms all companies in the industry. Effects of Predatory Pricing on an Industry Short-Term Effects The strategy is considered successful if the firm is able to recoup its short-term losses with much higher prices (and thus, higher profits) in the long term. Predatory pricing may require a firm to sustain losses for a certain period of time and, thus, is typically only undertaken by large, established firms capable of absorbing short-term losses. The ultimate goal behind this pricing strategy is to establish a strong market position and to drive out competitors. Predatory pricing typically takes place during a price war. Understanding the Rationale Behind Predatory Pricing ![]() In contrast to loss leader pricing, predatory pricing is aimed toward setting prices low for an extended period of time, long enough to, hopefully, drive the competition out of the market. A predatory pricing strategy, a term commonly used in marketing, refers to a pricing strategy in which goods or services are offered at a very low price point, with the intention of driving out competition and creating barriers to entry. ![]()
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