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In the U.S., is it illegal ("anti-trust") to deliberately operate a business at a loss by providing services priced to steal customers from competition?

Assume there is a projection of future earnings that would recover the losses incurred in the process by increasing the prices once most competition has been driven out.

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    Related: Loss Leader Strategy
    – user35069
    Mar 21, 2022 at 20:47
  • How are future earnings projected to result from this strategy? Is the idea that one could increase prices after the competition goes out of business? Or that customers would love the product so much that they abandon the competition? Or something else?
    – bdb484
    Mar 21, 2022 at 21:12
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    Uber exists. Does this answer your question?
    – Tiger Guy
    Mar 21, 2022 at 21:53
  • @bdb484 -- increase the prices once most competition has been driven out
    – amphibient
    Mar 22, 2022 at 13:16

2 Answers 2

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According to the FTC which is the main U.S. federal government agency charged with administering federal anti-trust laws:

Can prices ever be "too low?" The short answer is yes, but not very often. Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time. 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. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market. Although the FTC examines claims of predatory pricing carefully, courts, including the Supreme Court, have been skeptical of such claims.

Q: The gas station down the street offers a discount program that gives members cents off every gallon purchased. I can't match those prices because they are below my costs. If I try to compete at those prices, I will go out of business. Isn't this illegal?

A: Pricing below a competitor's costs occurs in many competitive markets and generally does not violate the antitrust laws. Sometimes the low-pricing firm is simply more efficient. Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position.

Most (if not all) states also have parallel state anti-trust laws which sometimes prohibit conduct that is not prohibited by federal anti-trust laws, although the overlap between the two is substantial.

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Yes.

The practice you're describing -- raising prices after driving competitors out of business by selling below cost -- is known as "predatory pricing," and it is a classic monopolistic practice outlawed by Section 2 of the Sherman Act and by the Robinson-Patman Act:

Predatory pricing may be defined as pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run. It is a practice that harms both competitors and competition. In contrast to price cutting aimed simply at increasing market share, predatory pricing has as its aim the elimination of competition. Predatory pricing is thus a practice "inimical to the purposes of the antitrust laws, and one capable of inflicting antitrust injury.

Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 117-18 (1986)

Federal courts' willingness to enforce the Sherman Act against predatory pricers has varied drastically over the years, but the U.S. Supreme Court laid out limits on their authority in Brooke Group Ltd. v. Brown Williamson Tobacco Corp., 509 U.S. 209, 113 S. Ct. 2578 (1993):

  1. “First, a plaintiff seeking to establish competitive injury resulting from a rival's low prices must prove that the prices complained of are below an appropriate measure of its rival's costs.” The Supreme Court has not yet told us what is the "appropriate measure" of costs, but there are arguments that it should look at marginal costs, average variable costs, long-run average incremental costs, and average avoidable costs.

  2. "The second prerequisite to holding a competitor liable under the antitrust laws for charging low prices is a demonstration that the competitor had a reasonable prospect, or, under § 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices." In other words, the courts are going to ask how likely it was that the pricing strategy was likely to result in eventual profits that offset whatever losses resulted first.

Many cases seem to fall apart on the second prong, as the courts often find that although a business was pricing below cost, the pricing structure did not result or was unlikely to result in an eventual recovery of those losses. That was the case in Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574 (1986): Zenith alleged that Matsushita had been charging artificially low prices on TVs exported to the United States for 20-plus years, but the Court ruled for Matsushita, holding that the plaintiffs hadn't produced actual evidence of an agreement to lower prices, and that the fact that the prices were still artificially low suggested that the conpsiracy to drive competitors out of the market was either failing or nonexistent:

The predatory pricing scheme that this conduct is said to prove is one that makes no practical sense: it calls for petitioners to destroy companies larger and better established than themselves, a goal that remains far distant more than two decades after the conspiracy's birth. Even had they succeeded in obtaining their monopoly, there is nothing in the record to suggest that they could recover the losses they would need to sustain along the way. In sum, in light of the absence of any rational motive to conspire, neither petitioners' pricing practices, nor their conduct in the Japanese market, nor their agreements respecting prices and distribution in the American market, suffice to create a "genuine issue for trial."

In the hypothetical you offer, though, there is some sort of "projection" indicating that the strategy may actually be successful. Depending on how reliable that projection is, and how likely it projects the recovery to be, adopting the strategy could therefore be a violation of either the Sherman Act or the Robinson-Patman Act.

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  • Good answer but the question has the problem of opposite title and body Boolean, making “yes” problematic.
    – Damila
    Mar 23, 2022 at 1:14
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    And I was the one who inserted that error into the title, no less. It's fixed now.
    – bdb484
    Mar 23, 2022 at 4:46

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