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I just went through a Compliance eLearning which had a section covering anti-trust laws. My understanding of predatory pricing from that is inline with this description I found on wikipedia

During the period of predatory prices, the predator's profit is negative, or the price is lower than the cost.

At the end of the eLearning, a quiz asked:

If a competitor tries to enter the same market one is in, what would be lawful behavior and what might lead to prosecution in regards to anti-trust laws?

The correct answer, of multiple possible answers, suggested that

One could try to make their products attractive by giving the best reasonable discount you could offer.

While another possible answer was

Giving a discount on the Software suite that will temporarily sell the software below cost price. But this can be changed again as soon the competitor is driven off the market.

which obviously would be a breach of anti-trust laws.

But this left me confused, if I ever was working in sales or a related department....

What is actually considered the cost of a software service in this regard? And what is considered a reasonable discount in that regard, and what is unreasonable?

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  • 9
    That's an odd definition. How does it distinguish between predatory prices and loss leaders, then?
    – Mason Wheeler
    Mar 11, 2020 at 16:21
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    This doesn't sound like US law unless there are additional circumstances, what country?
    – AbraCadaver
    Mar 11, 2020 at 23:30
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    Note, there is a difference between software products and software services. What you are describing appears to be about software (the products).
    – RBarryYoung
    Mar 12, 2020 at 4:33
  • @AbraCadaver It's also not correct US English.
    – Acccumulation
    Mar 12, 2020 at 4:49
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    @RBarryYoung a lot of software these days is sold as a service. an not as a product.
    – roel
    Mar 12, 2020 at 9:23

4 Answers 4

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There is no fixed rule for this. Every situation is different, and of course there is nothing specific to software in there. It is very much a matter of intent.

For example, negative profits are no clear sign. Company X thinks they could make $6 million profit by developing a product and selling it, minus $4 million development cost. It turns out development cost is $10 million. Raising prices is not possible because of competition. Company X will suffer losses of $4 million, without being predatory in any way.

The reality is that a judge will look at the situation, take everything into account, and make a decision based on what they see.

Since this is all about competition law, the main point is the intent or effect that your pricing makes competition impossible. That's what the judge will decide. For example, if you offer your service for $500,000 while others offer a similar service for $1,000,000 you could be using some super efficient processes that allow you to make money at that price, or you might have an idiotic sales person who will drive your company into bankruptcy, or you are trying to drive your competitors out of business. That's what the judge will decide.

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    If you sell for less than your competitors, it's predatory pricing. If you sell for more, it's price gouging. If you sell for the same, it's collusion.
    – Acccumulation
    Mar 12, 2020 at 4:50
  • @Acccumulation Not true. There is lots of case law holding that if you sell for the same it is only collusion if there is actually a price fixing agreement (perfect competition tends to naturally produce uniform pricing too). Predatory pricing requires an intent to put competitors out of business by making competition impossible and utilizing your greater capital and staying power. Price gouging normally requires some process or circumstances that cause even informed people to pay unconscionable prices, merely charging more doesn't cut it.
    – ohwilleke
    Mar 12, 2020 at 7:06
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    @Accumulation: Are you trying to be cynical? Because otherwise your comment makes no sense.
    – gnasher729
    Mar 12, 2020 at 10:01
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    @gnasher729 Yes, I think it was a non-serious cynical comment.
    – user253751
    Mar 12, 2020 at 10:43
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Realistically, this definition doesn't work - it works for manufactured goods, but since almost all the cost of software is in development and there is little marginal cost, it's impossible to assess.

You might be able to evaluate some situations where boxed software is sold below the cost of the boxes, or software services that are hosted on Amazon AWS are sold for less than is being paid to Amazon.

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    It doesn't always work for manufactured goods either. Consoles are said to be sold at a slight loss, but the companies make up for it in the games.
    – Mooing Duck
    Mar 11, 2020 at 21:41
  • Printers. Some are sold very cheap, and HP makes all the profit selling ink. And tries to prevent competition in the ink market.
    – gnasher729
    Mar 12, 2020 at 10:03
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    @gnasher729 and HP could very well have been convicted for predatory pricing/unfair practices, by selling printers for less than production cost to drive out competition and then increase ink prices. This is exactly one of the behaviors anti trust laws should mitigate.
    – Falco
    Mar 12, 2020 at 16:20
  • Falco: No, they couldn’t. Because you can’t just buy a printer, you have to buy printer and ink. It doesn’t prevent competition because the competitor can tell their customers truthfully “their printers are cheap, but they will rip you off with the ink”. Ripping off customers isn’t anti-competitive.
    – gnasher729
    Mar 14, 2020 at 3:26
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Anti-trust is not a very powerful tool any more in the US, especially around pricing. This is really just an accounting issue, because software license revenue recognition is different from services recognition, leading companies to try play games between the two (which is covered in the US by GAAP).

Eastman Kodak Co. v. Image Technical Services, Inc. seemed to allow charges for predatory pricing, but in practice such charges remain very difficult to prove and prosecute. The environment has moved away from anti-trust worries in general. For example, at Procter & Gamble in the 90s, we held that wholesalers or manufacturers setting prices for retailers was an anti-trust worry, but this is done now in virtually all markets.

https://www.hbs.edu/faculty/Publication%20Files/19-110_e21447ad-d98a-451f-8ef0-ba42209018e6.pdf gives an excellent overview of how anti-trust application has changed since its introduction in the US.

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which obviously would be a breach of anti trust laws.

I'm not sure it's obvious at all. Anti-trust law is complex and subtle. In the US, selling below your costs is only a violation of anti-trust law if done to eliminate competition, but "A firm's independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition". If it came to trial, a judge or jury would have to assess the company's behavior and intentions.

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  • Thats actually part of my quote „doing it, till the competitor is driven off the market“ And given that intend, it felt like an obvious breach to me. Might be wrong tho
    – Zaibis
    Mar 11, 2020 at 17:59
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    @Zaibis the question seems to indicate that the answer from which the "driven off the market" clause is quoted is in fact a wrong answer.
    – phoog
    Mar 14, 2020 at 18:44

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