Competition laws are designed to enhance market competitiveness, ultimately reducing consumer prices and improving consumer welfare. On these terms, predatory pricing may appear as a paradox, because a predatory pricing claim asserts that a low price is anticompetitive. However, this so-called paradox is not profound. The traditional theory of predatory pricing is quite straightforward.
The three critical elements in Nigerian law are (a) pricing theory that fails at least one of the three tests, (b) dominance in the market and (c) consumer harm. These are rational elements that are welcome to separate illegal predatory pricing from pro-consumer competitive pricing, as the Air Peace saga will show. \In this article, we examine the concept of predatory pricing, the various theories of analysing predatory pricing, and predatory pricing under Nigerian law.
In this article, we examine the concept of predatory pricing, the various theories of analysing predatory pricing, and predatory pricing under Nigerian law.
What is Predatory Pricing?
Predatory pricing refers to the practice of selling goods at low rates to push rivals out of the market, discourage new entry, and monopolize the market.[1] It typically involves two phases. During the first phase, the predator would price its product significantly low so that rival companies would not be able to sell at that price or so that if they sell, they will incur losses and leave the market. If the predator succeeds under the first phase, the predator would, in the second phase, be able to charge supracompetitive prices and earn constant excess revenues and profits in the market. Most predators will in fact not go on to the second phase because regulators will harass them and dead rivals will come back to life.
For predation to be rational, there must be some expectation that these present losses (or foregone profits), like any investment, will be made up by future gains. This implies that the predator has some reasonable expectation of gaining exploitable market power following the predatory episode and that profits of this later period will be sufficiently great to warrant incurring present losses or foregoing present profits. The theory also implies that some method exists for the predator to outlast its victim(s), whether through greater cash reserves, better financing, or cross-subsidisation from other markets or other products.
What Does Not Constitute Predatory Pricing?
Predatory pricing is different from typical competitive price wars or price reductions.[2] For example, smaller or new players offering temporary, deep discounts would not be considered predatory as they may not drive bigger firms out of the market. It is commonly viewed that predation can only be a rational strategy for a very dominant company, that is, a company with a very high market share.[3]
Conversely, a firm can reduce its product price for a variety of reasons. It can reduce the price because of real or ostensible variations in the operational cost or consumer demand for the product. Also, a company can reduce the price of its product as a marketing strategy.
Courts have also acknowledged the difficulty in determining whether or not a firm’s reduction in the price of its product is predatory. In Brook Group Ltd v. Brown & Williamson Tobacco Corp. (509 U.S. 209 (1993)), the United States Supreme Court stated thus: “the mechanism by which a firm engages in predatory pricing-lowering prices—is the same mechanism by which a firm stimulates competition; because cutting prices in order to increase business often is the very essence of competition… Mistaken inferences are especially costly, because they chill the very conduct the antitrust laws are designed to protect.[4]
[1] Daniel A Crane, ‘The Paradox of Predatory Pricing’ (Cornell Law Review) 2005 <https://scholarship.law.cornell.edu/clr/vol91/iss1/1 > accessed June 10th 2024.
[2] Patrick Bolton, Joseph F Brodley and Michael H Riordan, ‘Predatory Pricing: Strategic Theory and Legal Policy – A Response to Critique and Further Elaboration’ (2001) <https://www.columbia.edu/~mhr21/papers/bbr-response.pdf> accessed February 22nd 2025.
[3] Ibid.
[4] Brook Group Ltd v Brown & Williamson Tobacco Corp 509 US 209, 226 (1993).
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