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PaperclipPerfector  1yr ago (text post)   28019 thread views

Culture War Roundup for the week of January 22, 2024

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Low price products aren't a problem if they stay that way. They are a problem if the company raises the price once they've driven competitors out of market and relies on entry costs to keep others from entering the market again. The company can also use lowering the price as a threat: if anyone tried to enter the market they'll lower the price and make them go broke.

If you precommit to doing something that harms both you and your target, you may get your target to act as you wish and not have to follow through on your precommitment very often.

This is like playing a game of chicken. And the strategy of a pre-commit is great against a singular opponent. But below production cost pricing is like driving on the wrong side of the road. Yes people will swerve to avoid hitting you, doesn't mean everyone will see you or swerve fast enough. And now you've just dumbly pre-committed yourself to crashing against someone that doesn't see you there. Meanwhile the more aware competitors will wait for your crash to come in.

There are just so many ways "predatory pricing" can go wrong and blow up in the face of the company doing it. History is littered with companies that took market advice from socialists and wound up in the dustbin. Its a very risky strategy with a high cost and a potentially low payoff.

As long as it's a valid threat, they don't have to do it very often and many companies will refuse to enter the market because of the threat without costing the big company anything.

In actual markets this is the mechanism that matters, but it matters more in reverse. You'll have something like two companies producing paper products. They can easily retool to start producing the other type of paper product, but they don't because the other company is already selling that paper product cheaply. If one company ever jacks up its price, its easy for the second company to switch into the market and start selling at a profit.

Basically entry into a market is sometimes cheap and easy for certain companies.

I could go through things like this all day. It seems pointless. For predatory pricing to work it requires a perfect set of market conditions to exist. And those conditions might not even exist for very long. As soon as the conditions stop existing you might be fucked if you went the predatory pricing strategy. The proof is that it just doesn't happen very often. Companies certainly get prosecuted for it, but many of those are political witch hunts.

They can lower their prices but to an amount that's still greater than the cost of production. Then it isn't predatory pricing.

Except that is basically exactly what Standard Oil did and what WalMart does and they are the two go to examples of "predatory pricing".

This is like playing a game of chicken.

Yes, it is. But there are two factors. The first is that it's a game of chicken. The second is that if the company does drive someone out of business, there are entry costs for someone else to enter the business again. Yes, sometimes entry into a market is cheap, but sometimes is not always.

Also, as sliders points out above, some products have high initial costs but low marginal costs and the company can use predatory pricing indefinitely since they already had all the loss up front.

You make me a liar, fine, I'll go through the circumstances. These are some of the things that make predatory pricing possible:

  1. High barrier to entry and high barrier to exit. If you can just recoup your high entry costs by selling off the capital then the high barrier to entry doesn't matter much. Or if its a factory making X widgets, and you can just retool it to make Y widgets instead it also doesn't matter.
  2. Existing market domination. You have to already be the top company in the market. AND if there are high barriers to entry and exit it means other companies in the market are more likely to hold on until the last moments.
  3. Demand for product has to be inelastic (note: demand for a type of good might be inelastic, even if all specific goods in that category have elastic demand, such as food. Everyone needs food, but different crops and meats can all be partial substitute for each other). Inelastic product markets are very rare to begin with. They also tend to have lots of competition since everyone likes being a seller in an inelastic market.
  4. Usage for the product has to be limited. Some products can be used in other ways when the price is low enough. If the product has other usages, then the low pricing will lead to it being used in those other things and the attempt to "flood the market" will fail. This contradicts the inelastic demand. Most products with inelastic demand have that inelasticity because they are used in a wide range of things. Like base resources metals/oil/minerals/etc.
  5. Storage and recycling of the product needs to be difficult. If storage or recycling is easy, then other people can store or recycle it when the company is selling it cheap, and offload it when they start to increase prices again.

The factors that make predatory pricing possible are almost all contradictory. For it to be possible also makes it unlikely.

This conversation has gone down too many sublevels, and I feel that I have said all that needs to be said on the topic. I'm done with it. I'll read any response you have on this topic but I won't be responding anymore.

The demand doesn't really have to be elastic. It has to be elastic to the point that after the public buys all the lower priced versions from the big company, they'll still buy the regular priced versions from its competitors. That is, it has to be elastic at the margin where the remaining products are regular priced. If it was elastic like that, the regular market without predatory pricing would also have been elastic, which is unlikely since it would have expanded until it no longer was.

As for your point about storage, most people don't behave like homo economicus and won't stock up like that. And to the extent that they do, it not only makes it harder for the big company to sell at high prices, it also makes it harder for lower priced competitors to enter the market again, so it works in both directions, not just against the big company.

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