Mistaking Below-Cost Pricing for Profit Sacrifice in Predation Analysis
Predatory pricing requires a dominant supplier to incur a profit sacrifice to eliminate a competitor. Prices that imply a sacrifice if applied in the long run (i.e. below long run average incremental costs) may not imply sacrifice in the short run (i.e. above average variable costs).
This raises the question whether prices in this range actually imply a profit sacrifice at all. This in turn challenges the notion that such prices imply predation in the presence of predatory intent. This is because without profit sacrifice the economic evidence does not corroborate that the dominant firm in fact acted on such intent.
In this article, Lau Nilausen, Senior Director at FTI Consulting, discusses the need for a more robust approach to assessing predatory pricing than the traditional reliance on standard cost measures and evidence of predatory intent.