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Predatory Pricing

A popular fallacy that has become part of the tradition of anti-trust law is Predatory Pricing. This where a big company that is out to eliminate its smaller competitors and take over their share of the market will lower its prices to a level that dooms the competitor to unsustainable losses and forces it out of business. A remarkable thing about this theory is that those who advocate it seldom provide concrete examples of when it actually happened. A company that sustains losses by selling below cost to drive out a competitor is following a very risky strategy. Even if our would-be predator manages somehow to overcome these problems, it is by no means clear that eliminating existing competitors will mean eliminating competition. Even when a rival firm has been forced into bankruptcy, its physical equipment and the skills of the people who once made it viable do not vanish into thin air. A new entrepreneur can come along and acquire both. Bankruptcy can eliminate particular owners and managers, but it does not eliminate competition in the form of new people, who may either take over an existing bankrupt enterprise or start their own new business from scratch in the same industry.
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