Predatory pricing, also known as price slashing, is a commercial pricing strategy which involves reducing the retail prices to a level lower than competitors to eliminate competition. Selling at lower prices than a competitor is known as undercutting. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without suffering a substantial loss. The aim is to force existing or potential competitors within the industry to abandon the market so that the dominant firm may establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.
The critical difference between predatory pricing and other market strategies is the potential for consumer harm in the long-term. Despite the initial buyer's market created through firms' competing for consumer preference, as the price war favours the dominant firm, consumers will be forced to accept fewer options and higher prices for the same goods and services in the monopolistic market. If the strategy is executed successfully, predatory pricing can cause consumer harm and is, therefore, considered anti-competitive in many jurisdictions, making the practice illegal under numerous competition laws.
