Anti-Competitive Pricing in the UK: 3 – Predatory Pricing

Predatory pricing is illegal in the UK and considered anti-competitive. It must not be confused with competitive pricing which is a legal and indeed necessary part of any market economy. The key difference revolves around how profit realisation and predatory pricing, as the name suggests, sees competitors as prey and the predatory company killing them of one by one.

What is Predatory Pricing?

Predatory pricing sees a dominant market leader strategically reduce its prices to the point of generating a loss in the short-term. This approach of selling below cost is enacted in order to remove the competition from the market as they cannot sustain the losses generated by competing at the new lower price points. Once the competition is forced out of the market the dominant market leader has a monopoly and can then increase their prices recouping the losses and going on to generate significant profits in the medium to long term.

The pricing strategy name of predatory pricing is the perfect terminology for this approach. The dominant market leader acts as the lion in the Savanna whilst the other competitors are the wildebeests, zebras, and antelopes. The lion one by one kills each of its prey by dropping the prices with each price drop killing a particular prey until no prey are left. Once the market finishes in this position the lion is free to roam and control the market as the predator king.

What market conditions assist Predatory Pricing?

The essential market condition for predatory pricing to thrive is that the market leader must have certain economic, technical and labour strengths. In this way they can sustain the losses in the first part of this pricing strategy to then recoup the monies during the second phase, once the competition is eliminated. In addition the competition must be sufficiently weak to not be able to sustain the lower market prices in the medium to long term otherwise a strategy that begins as predatory pricing may just result in a sustained lowering of the market value of products and services within the particular market.

Why is Predatory Pricing prohibited in the UK?

Predatory pricing is illegal in the UK mainly based on one single reason. The increase in monopoly power within a market is bad for the consumer as it removes choice from the market. As well as a lack of choice, predatory pricing will always result in higher prices for the end consumer which creates economic harm. In markets where products and/or services are ‘essentials’ this economic harm can cause wider societal harm hence the UK governments decision to make this pricing strategy illegal.

It is however worthwhile to point out again that predatory pricing should not be confused with competitive pricing. Price wars are great for consumers if all, or at least most, of the competitors come out of the price war intact. The price war will result in better prices for customers and could also see the competitors become more efficient as they focus in on managing costs in order to drive lower than average market prices for a sustained period of time.

What happened on the buses in the UK?

The common UK case used when discussing predatory pricing is the Darlington Bus Wars case from 1994. Busways/Stagecoach offered free bus travel to try and drive the Darlington Bus Company out of business. In this way they didn’t just offer a low price point they offered a free service, as we discussed in The Psychology of Pricing the power of free is immense!

The result of Busways/Stagecoach pricing strategy was that the Darlington Bus Company were driven out of business leaving a monopoly power left in the market. Over the next decade bus use in the area fell by almost 40% with some economists arguing this was the direct response to escalating prices caused by the predatory pricing strategy. The societal harm kicked in quickly with customers only benefiting from free rides in the short term before having to endure higher prices in the medium to long term. Interestingly the societal harm could also be considered ecological with buses driving down pollution and the assumption that the reduction of bus usage saw more cars on the road and therefore more atmospheric pollution 

How can you beat Predatory Pricing?

In a word beating predatory pricing is all about “differentiation”. Differentiation involves offering the market variety that solves their pain points. In this way you weed out the customers who are only interested in price and focus on the customers willing to pay more by offering them an enhance product or service which addresses their “pain points”.

One example of differentiation is offering tiered service plans. In this way you can compete with predatory pricing by offering an economy version of your service. The aim of the game however is to move customers from this tier to the standard or premium tier where the service offering is of a superior quality but crucially the price point is far higher allowing for above average market pricing and subsequent healthy profits.

References

Economics Help (2021) Darlington Bus wars (1994) https://www.economicshelp.org/blog/glossary/predatory-pricing/

James Hawkes BSc, MSc

Pricing Manager