Chapter 6: Pricing Strategies of Dominant Firms
I INTRODUCTION In their review of trade and competition policy in 1997 the WTO distinguished ‘abuse of a dominant position’ or ‘monopolisation’ as a primary area of concern for antitrust policy. Abuse is defined as ‘a practice employed by dominant firms to maintain, enhance or exploit a dominant position in the market’ (WTO, 1997: 42). In addition to market foreclosure through vertical integration and the control of scarce facilities and inputs in distribution channels, which we discussed in Chapter 5, the report also includes in this category price and non-price predation, price discrimination and exclusionary contractual arrangements. Each of these topics has an extensive literature. To keep the discussion manageable we confine ourselves in this chapter to three interrelated areas which have an important bearing on both competition and trade policy. The first, predatory pricing, relates to pricing strategies used by dominant firms with the objective of maintaining or enhancing monopoly power against existing competitors or new entrants. It involves price cuts to very low levels (precisely how low we discuss below) to intimidate or eliminate rivals with the intention subsequently of raising prices to supra-competitive levels. The second, pricing strategies in high-tech industries, may also involve very low prices but in this case the rationale is quite different, even though to an outside observer the strategy may appear predatory. Extensive learning effects may make it perfectly rational to reduce prices to very low levels in the knowledge that the experience of current production will reduce future cost levels. These...
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