PREDATORY PRICE

• What is predatory pricing?  Why is it difficult to prove predatory pricing?
• Predatory
  pricing refers to a situation where a firm charges a price below its
  cost of production, with the intent of forcing its competition to either
  immediately exit the market, or to exit the market after facing losses
  for a while. Once the competition exits the market, the predatory firm
  raises prices.
• There are three main reasons why it is difficult to prove that a firm is engaged in predatory pricing.
• The
  first is determining whether a firm is charging prices that are below
  average variable costs.  A rational firm will not stay in business when
  the price for its product is below its average variable cost, unless it
  has some intent other than current loss minimisation.  The Areeda-Turner
  test is employed by the US courts to determine whether or not there is
  any predatory intent.  According to this test, a price below the
  shortrun marginal cost should be unlawful.
• The
  second is proving intent. Firms can reduce prices because costs have
  fallen; hence, it is difficult to prove that a firm reduced prices with
  predatory intent.  
• The
  third is the rationale for predatory pricing. The rationale is that the
  predatory firm manages to force competitors out from the market, and
  after their exits, raises prices above the competitive level.