Legal Lingo: What is predatory pricing?

Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts leading to an often impenetrable wall of jargon for students and trainees. Next up in our Legal Lingo series, which we've introduced to help break down this jargon, is an explanation of what predatory pricing is.

When pricing is predatory, it’s not the consumer that’s the prey – well, at least not in the short term.

Predatory pricing can be a strategy used by a dominant company to drive competitors out of the market by temporarily lowering its prices below the cost of production. By selling products at a loss in the short run, the company aims to eliminate competitors who are unable to sustainably match these prices, often driving them out of the market. Below cost pricing can also deter new businesses from entering the market, as they deem it unprofitable.

Such exclusion (or “foreclosure”) of rivals allows the dominant company to later recoup lost profits, for example, by raising prices above a competitive level. Despite the immediate, short-term benefit to the consumer, in the long term, this strategy can lead to higher prices, decreased quality or less choice in the market. Predatory pricing is therefore harmful to both competitors and consumers.

However, clearly not all price reductions amount to predatory pricing. The European Commission has established legal benchmarks from the case of AKZO for assessing potential predatory behaviour which may have the effect of excluding a dominant firm’s “as-efficient competitors”:

• Pricing below “average variable costs” (costs that vary with the level of output such as labour and material costs) is presumed to be predatory; whereas
• Pricing above “average variable costs” but below “average total costs” (which includes both variable and fixed costs) requires competition authorities to prove a company’s intention to eliminate competitors by looking at the specifics of the price cut, including timing and duration.

In the UK, the Competition and Markets Authority has found predatory pricing infringements involving potentially loss-making bus services (Cardiff Bus), the sale of newspaper advertising space (Aberdeen Journals) and the supply of morphine tablets (Napp Pharmaceuticals).