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Op-eds

15 February 2019February 15, 2019

The 'predatory pricing' myth returns

National Post, p. FP11

The 'predatory pricing' myth returns

The executive chairman of Canada Jetlines recently made the case in FP Comment that WestJet, through its Swoop brand, may running afoul of the country’s competition law by engaging in predatory pricing. In this scenario, if established players like WestJet are cast as predators, new entrants like Jetlines, an upstart ultra-low cost airline poised to enter the market, see themselves as the prey in need of protection.

Yet it is an open secret that the economics underlying competition law is highly contentious. Legislation that purports to help the least well-off by exposing large companies to lawsuits if they lower their prices should at least arouse skepticism. And this is precisely what competition law does, combined with a whiff of delusion about how we can control, through legislation and judicial decisions, economic developments that are really the result of technological change, geography, history, cost structures in different industries, the availability of capital, and the evolution of consumer tastes versus the prices they’re willing to pay for products and their alternatives.

But the old canard of predatory pricing has reared its ugly head once again, this time to argue that Swoop shouldn’t be allowed to be charge low prices because this makes it harder for new low-cost carriers to someday, at some point in the future, be able to offer cheap flights, too. If only prices were higher now, consumers would win in the end!

The theory of predatory pricing is based on the kind of big-business conspiracy theory from which social media memes are made: A large company might lower its prices below what competitors can sustain, and might even sell at a loss, in a bid to eliminate the competition. After the competitor has been forced into bankruptcy, the predator will raise its prices and live happily ever after earning monopoly profits. The End.

This might seem plausible at first glance, which is why it’s been such an inexhaustible source of political demagoguery. But there has never been a clear-cut example of a monopoly created through the use of these tactics. In fact, the argument has pretty much always been used by competitors that are unable or unwilling to cut their own prices. (Any resemblance to real companies, active or “poised to enter the market,” is purely coincidental.)

Why would predatory pricing not work? Because it can’t. The minute a competitor was driven out of the market by such tactics, its assets could be acquired by a new player, possibly at a steep discount. The predator would have to engage in selling below cost yet again, sustaining additional losses. This game of chicken could last indefinitely, until the predator itself had run out of resources. There’s no real-life example of successful predatory pricing because kamikaze pricing tactics are not something they teach in business schools, and with good reason.

Some might reply that in order to cut its losses, the predator could restrict its supply. But if it did, the “prey” would be able to step in and make up the difference by offering additional products or services at more normal prices. In other words, this would be a good strategy for driving your customers into the arms of your competitor.

And assuming customers actually believe that current prices will be followed by a steep increase if the “prey” is hounded out of existence, a savvy prey could also propose a long-term contract, which could take the form of a subscription (like a flight pass) or an innovative loyalty program, selling customers price insurance now against even higher prices later. In other words, competitors could base their business model around innovation and customer service, rather than the Competition Act.

The fact of the matter is that even the threat of competition is enough to keep would-be monopolists from jacking up their prices, as long as potential competitors are not barred from entering the market — and the appearance of new entrants like Jetlines proves that, in Canada’s air travel industry, they aren’t.

Selling cheaper than your competitor is the essence of market competition. To turn this logic on its head and pretend that low prices are somehow unhealthy is an abuse of language, and of consumer welfare, too.

It may be up to the Competition Bureau to determine whether laws and regulations were respected, but the economic justification for those rules is shallow at best.

Mathieu Bédard is Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.


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