Predatory Pricing

What Is Predatory Pricing?

Predatory pricing involves pricing below cost with the intent to drive competitors out of business, then raising prices to recoup losses. It's a potential antitrust violation, but proving predatory pricing is difficult. Courts are skeptical of predatory pricing claims because aggressive competition—including low prices—generally benefits consumers.

Legal Test for Predatory Pricing

To prove predatory pricing, plaintiffs must typically show:

Below-Cost Pricing

Prices below an appropriate measure of cost. Courts typically use average variable cost as the benchmark—prices above average variable cost are presumed legal; prices below are suspect. Some courts use average total cost as an alternative threshold.

Dangerous Probability of Recoupment

The predator must have a realistic chance of recouping losses through subsequent monopoly pricing. This requires market power and the ability to maintain high prices long enough to offset predatory losses. This requirement makes successful predatory pricing claims rare.

Intent to Exclude

Evidence that the pricing was intended to eliminate competitors rather than simply compete aggressively. Internal documents describing strategies to 'drive out' competitors can be powerful evidence.

Harm to Competition

The predation must harm the competitive process, not just competitors. A single competitor losing business to aggressive pricing doesn't constitute antitrust injury if overall competition remains healthy.

Defending Legitimate Low Pricing

Most aggressive pricing is legal competition, not illegal predation. Defenses include:

• Above-cost pricing: If prices exceed average variable cost, predation claims usually fail
• No market power: Predation requires market power; companies with modest market share can't effectively predate
• Legitimate business reasons: Introductory pricing, promotional campaigns, excess inventory clearance, and economies of scale are all legitimate justifications
• No reasonable path to recoupment: If the market structure makes recoupment impossible, predation claims fail

Safe Practices

• Price above average variable cost absent compelling justification for below-cost pricing
• Document legitimate business reasons for aggressive pricing (new product introduction, excess capacity, competition)
• Avoid language in internal communications about 'driving out,' 'eliminating,' or 'destroying' competitors
• Be especially careful if you have significant market power—dominant firms face greater scrutiny
• If implementing aggressive pricing in a market with few competitors, consult antitrust counsel

Case Study: The Challenge of Proving Predation In Brooke Group v. Brown & Williamson (1993), the Supreme Court set a high bar for predatory pricing claims. Even evidence of below-cost pricing wasn't enough; the plaintiff also had to show realistic recoupment probability. The Court reasoned that false positives (condemning competitive pricing) harm consumers more than false negatives (allowing rare predation). Result: predatory pricing claims rarely succeed. Aggressive low pricing, even if it hurts competitors, is usually legal if it benefits consumers. This gives businesses substantial freedom to compete on price without predation fears—as long as pricing is genuinely competitive and not part of a monopolization scheme.

Key Takeaways

• Predatory pricing requires below-cost pricing, intent to exclude, and realistic recoupment probability
• Legal standard heavily favors defendants—predation claims rarely succeed
• Price above average variable cost to minimize risk
• Document legitimate business justifications for aggressive pricing