Predatory pricing occurs when a company sets the prices for its goods well below that of its competitors, essentially driving the competitors out of business, or at least crippling their ability to sell a certain product. Wal-Mart has been known for such behavior and as a result, the owners of local businesses often try to prevent Wal-Mart from opening a store in their communities. Wal-Mart was recently hit with three charges of predatory pricing practices: in Oklahoma, Wisconsin and Germany. American Airlines was hit with a similar suit in violation of the Sherman Trust Act for lowering the prices on a certain route.
Wal-Mart was accused of predatory pricing when they began to sell staples such as butter, laundry detergent and milk for prices that were too low to allow competition. Such items have a standard price in the industry, and Wal-Mart’s lowering of the prices was in an attempt to force other retailers out of business, thus creating a monopoly. In addition, lowering these prices gives consumers the impression that Wal-Mart has such low prices on all of their merchandise, and this assertion is not true. The company received several warnings to raise their prices, all of which were ignored.
American Airlines was the target of a predatory pricing suit when they lowered prices significantly (as well as raising capacity) on four flights originating at the busy Dallas/Fort Worth hub. The goal, of course, was to monopolize these routes so that the losses they sustained by lowering their prices would be made up in the sheer volume of passengers on the flights. During litigation, American Airlines was able to prove that it had not priced the tickets below cost, nor had it violated rules in regard to capacity. As a result, the District Court ruled in favor of American Airlines, noting that “the government had not succeeded in establishing pricing below an appropriate measure of cost.” (Dorman, 2006) In other words, American Airlines’ prices were reasonable and not predatory.
Dorman, G (2006). Antitrust and Competition Policy Client Experience. Retrieved December 7, 2006, from NERA Economic Consulting Web site: http://www.nera.com/PracticeArea.asp?PA_ID=1&more=ClientExp&c_ID=311
(2000 Nov 1). Wal Mart charged with predatory pricing. Retrieved December 7, 2006, from The Hometown Advantage Web site: http://www.newrules.org/retail/news_archive.php?browseby=slug&slugid=28