Question

Describe the Chicago School’s critique to the predatory pricing. What you think about it?

Answer 1

Predatory pricing,also known as keeping the price below costs in order to wipe out one or more rival firms, has a long and vital role as an economic characteristics placed as an anti-competition tool. A predatory pricing strategy works on a very simple logic. A firm which acts as a predator temporarily charges a price below its costs. This would result in having a massive impact on its rivals or better considered as the prey in this case,they will either lose their customers, or will be left with no option other than reducing the price to deal with the predator, where they might have to undergo losses and lose business opportunity and sometimes could result in complete shutdown. The predator can then become supreme monopolist and capture the entire market and can create a profitable environment for themselves.

Traditional economic analysis, as well as the legal framework in most countries, assumes that only a giant firm which already has a large share of the market will be able to benefit from predatory pricing after inducing the exit of its rival or prey, who are usually treated as new entrants with small market shares. Until the 1970s, allegations of this kind often persuaded antitrust/competition agencies to act against predation. Afterwards the growing influence of the so-called Chicago critique made them much more sceptical. Scholars associated with the Law School of Chicago University argued that predatory pricing was unlikely to be a profitable business strategy, for several reasons. First, precisely because it has a large market share, the losses incurred by a dominant firm that sets its prices below its costs will necessarily be larger than those of its intended victims. It might be argued that a predator with superior financial resources can sustain a period of losses to wipe out its rivals .But it does not mean that the prey cannot bounce back. If the market is a big one and the demand is high, the prey can still invest more capital and rectify the mistakes to sustain the market and can perform exceptionally well in the market. The simple logic being the better fighter survives.

According to the analysis, I do believe that the concept of predatory pricing can vary according to the market structure and the consumer's demand. The cocept still is considered to be irrational and unfeasible,so the pricing may have different impact on different markets. Considering as a test and trial phenomenon it may result in heavy profits by wiping out the rivals or have a little or no impact on profits as there are also certain amount spent or expenses in reducing the price, lower than the cost. So i believe it may have little or no impact on the profits in the short run but may be beneficial in the long run.

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