AskSia

Plus

Discuss the impact of predatory pricing in the context of monopolistic competiti...

Dec 15, 2023

Discuss the impact of predatory pricing in the context of monopolistic competition.

Answer

In the context of monopolistic competition, predatory pricing can temporarily lead to lower prices for consumers but can have negative long-term effects on market competition and consumer welfare. Predatory pricing occurs when a firm sets prices below its costs with the intention of driving competitors out of the market. Once competitors are eliminated, the predatory firm may then raise prices above competitive levels, potentially leading to a loss of consumer surplus and a decrease in market efficiency.

Key Concept

Predatory Pricing

Explanation

Predatory pricing is a strategy where a firm deliberately sets its prices low enough to incur losses in the short term to eliminate competition. In a monopolistic competition setting, where many firms sell differentiated products, this can lead to a temporary monopoly. Once the competition is driven out, the predatory firm may raise prices, leading to higher profits for the firm but worse outcomes for consumers and remaining competitors. This practice can be harmful to market health and is often scrutinized and regulated by antitrust laws.