Predatory Pricing in eCommerce – Advantages & Disadvantages

7 July 2022 - 10:56, by , in Best practices in price monitoring, Comments off
Reading Time: 5 minutes

Do you happen to have a pulse oximeter at home? If you have it most likely you bought it over the past two years. Correct? The COVID-19 pandemic gave tremendous rise to the market for medical equipment for at-home health monitoring. This rise in demand allowed sellers to compete using price as their main weapon or by scamming people by selling broken devices.

Either way, this market has created the perfect conditions for sellers to implement a predatory pricing strategy. Therefore, if you happened to buy an oximeter in the past two years, you bought it from a market dominated by a company that employed a predatory pricing strategy.

Find out below whether this is a wise choice and what consequences it leaves behind.

Predatory Pricing Strategy

What is Predatory Pricing?

Predatory pricing is just another pricing strategy among many. Is it the most commonly implemented? Is it the most ethical one? Let’s dive into the basics.

When businesses implement a predatory pricing strategy, they lower product prices to the bare minimum, to the extent that competitors get forced to leave the market.

Predatory pricing strategy aims to undercut the competition and establish an absolute advantage in the market, even if that implies product prices that are below costs. Businesses choosing to implement this strategy must be aware of the initial losses that they could face at first, but this strategy can bring long-term benefits.

Does this seem like a clear path to establishing a monopoly on the market?

When to Implement?

As mentioned, businesses able to endure losses for some time can implement the strategy to fully drive competition out of the market, after which they are in a position to raise prices again.

In the long run, those businesses will win the market and gain an unfair advantage. Let’s assume that companies ready to implement predatory pricing strategies had a long preparation period, especially regarding building financial capability. 

When this strategy gets implemented, the most vulnerable group on the market are newcomers, they are the first to leave, and there are almost no opportunities for new companies to enter the market. It is unlikely that a business can withstand such financial losses without thorough preparation. Even if they try to survive for a while, is it worth such losses?

Is it illegal? 

In many countries, a predatory pricing strategy is illegal as it violates antitrust laws developed by the government to protect consumers and ensures fair competition.

On the other hand, in most cases, it is difficult to prosecute entities that implement this practice as they can successfully defend their business practices as their regular competition decision-making processes. Another significant thing to mention is that a predatory pricing strategy often doesn’t hit the goals because of the great difficulties to retrieve initial losses afterward.

Predatory Pricing Characteristic:

Market – Eliminates Competition – Monopoly

When employing predatory prices, a company aims to eliminate the competition as much as possible. Anyhow, a predatory pricing strategy implemented to any extent can eliminate a vast majority of competitors. Primarily removes new entrants and creates barriers for new businesses to enter the market. More successful competitors could fight for some time, but eventually, they will be unable to sustain the financial pressure which will drive them out of the market.

Predatory pricing violates antitrust laws and makes the market more vulnerable to a monopoly. Monopoly refers to market dominance by one company while cutting out the competition. Predatory Pricing is one of the few types of monopolistic behaviors that can be ground for legal actions if proven. Predatory Pricing is considered monopolistic if the predatory company can lower prices at one moment and has enough market share in the other to regain its losses.

Consumers – Price War – Fake Products

At first, the price cut appears to be beneficial for consumers. Bearing in mind that prices are a key weapon for sellers when it comes to customer acquisition and that in most cases purchasing decisions are influenced by price, we can conclude that low prices benefit both parties. Once a predatory company enters the market, it triggers a price war as competitors compete to see who can offer lower prices. As we explained above, once the competition is eliminated, the predatory company will raise the prices and leave the customers without an alternative to buy from. Therefore, just as for the company, for the consumers, predatory prices are a good short-term solution but not sustainable.

To get back to the oximeter story from the introduction, the oximeter was one of the most commonly bought equipment during the pandemic. When a predatory pricing strategy implements in the eCommerce industry, it scams consumers as companies lure them with low prices but sell fake or broken products. This theory is proven by many people exposing faulty oximeter products on social media over the past couple of years. Competitors are ready to fight predatory companies at the cost of consumers, even if lowering prices means lowering product quality and even selling fake products.

Predatory Pricing Strategy - What is it?

Real-Life Examples

Some of the most popular recent predatory pricing cases are Walmart/Target and Amazon/Diapers.com. These cases were actually unsuccessful examples of predatory pricing attempts. Both stories begin with the price war.

Walmart and Target are the biggest retail franchisees having their pharmacies in the United States that started the prescription drug price war in 2007. Walmart cut the drug prices to the state law limits discounts, which triggered Target to match the prices in a discount prescription drug program. Minnesota along with several other states, banned pharmacies from selling drugs below their real cost, ended the price war between two giants and prevented predatory pricing.

Amazon began the price war with Diapers.com in 2010. There were rumors that Amazon, a growing eCommerce giant at the time, attempted to acquire Diaper.com but was denied. That triggered Amazon to lower the prices of diapers aggressively and implement different saving and loyalty programs aiming to destroy Diapers.com’s revenue. This price war was interrupted by other competitors in the market who found a way to fight their way back into the game.

Amazon, an eCommerce titan as it has been for years, conducted a successful predatory pricing strategy in the book market in 2013. Physical as well as electronic books were sold at very low prices which destroyed the competition, especially the physical bookstores.

What is the Conclusion?

We can agree that the predatory pricing strategy has its benefits and downfalls. Whether a business can implement it depends on the willingness to risk and the level of financial stability. After the biggest company cases, such as Amazon and Walmart, failed to implement this strategy successfully and achieve their goals, I would think twice.

Let’s list the benefits. A business can get a chance to ensure an absolute advantage in the market. Once it decreases competition and increases market share, it can raise the prices and bump its profits. That would be an ideal scenario and short-term solution. In the long term, this solution may prove unsustainable. As the company has to invest a huge amount while selling products at low prices, it often turns out that it cannot recover the losses later. 

Strategy disadvantages concern consumers at most, assuming that the predatory company recovers from initial losses. Once the company sharply raises prices, consumers will be affected as they have no buying alternative. Once a monopoly emerges, product quality may reduce.

What is the Alternative?

As mentioned, pricing strategy options are countless. Depending on your business’s goals and consumer base, you should decide which strategy benefits you the most. Ideally, that strategy shouldn’t be as risky as the predatory pricing strategy. 

When we consider the eCommerce market, an extremely fast-paced market, the most suitable and efficient price strategy would be any dynamic pricing strategy. Once a business decides on the pricing strategy it wants to implement, it can employ different software solutions to manage price monitoring and repricing processes.

 

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This blog is a place for eCommerce professionals to discuss ideas, methodologies and strategies to compete more effectively in the ever more tightening world of online retail. We explore things like competitive price monitoring, competitor business intelligence, competitive pricing, and counter-intelligence in general.

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