I don't understand...if you undercut your competitors so you're the sole survivor, I don't see how profiting is a obvious end result.
When you return prices to market value wouldn't competitors just appear again. Is predatory pricing really such a bad thing, I'd assume the market would just corrects itself later?
Although things like Uber may be a different beast. They basically got big enough that cities were willing to push aside all of these special interest rules that kept the taxi industry crappy. So by dumping their product and acquiring customers, they were able to change the legal environment and infrastructure around them.
But they are also at a huge disadvantage because they changed it for everyone behind them as well. Lyft doesn't have to burn money as fast and gets all the same benefits for scale. Under their current market position, the minute Uber starts raising prices, they die.
no. business school teaches you that you can compete on price (cost strategy), or on value (differentiation strategy).
if you compete on price, you’re betting that you are, or will be, the most efficient provider in the market (e.g., walmart and its supply chain dominance). it’s completely viable/acceptable to compete on price. what you don’t ever want to do is price on cost, rather than on value provided.
you can also compete on being better in many other dimensions, which is lumped into the broad differentiation strategy category. you are then betting that you are better on your dimension and that customers really value that dimension (more than price).
A classic example (presented to my MBA class) was the two adjacent pizza parlors in NYC competing on price and driving the selling price of a pizza down to less than a dollar, whilst a shop a block away and around a corner was able to keep normal pricing.
but you also compete on price in the marketplace--not so much as to ignore your costs, as you note, since negative margins generally don't lead to viable businesses, but price competition nonetheless.
your example is the simplest game-theoretic version of price competition, which is more of a teaching model than a practical application.
(dynamic) price discrimination and other marketing tactics are typically employed to ensure positive margins even as you compete on price in the marketplace (e.g., airline seats).
no, you should compete on price if you are the low cost producer, as my neighbor comment notes. monopolists frequently are the low cost producer because of economies of scale, scope, etc.
another "compete on price" strategy is if you are the disruptive upstart: you have small market share, so your losses (tangible and intangible) will be lower compared the losses suffered by the fat lazy high-multiples incumbent who must satisfy angry shareholders when they see profit eroding.
I could be wrong, but "network effects" is a recent phenomenon and business schools haven't really taught students about it much. Either way, we have very little history for assets that appreciate in value the more they are used. Traditionally it's been the exact opposite. In fact, this concept basically doesn't exist in finance other than translations into FCF...but depreciation does.
In the case of retail office space, it would depend on how much of the available office space you had locked up in long-term leases. If you have locked in most of the office space in long-term leases, but you are renting short-term, you can crank up your rates and in order to compete your would-be competitors would have to build an office builing, which is not impossible but is not quickly or easily done.
Not saying this was likely to work for We, just saying that's the theory.
WeWork is basically a hybrid bank/retailer. They take big, complex, slow-moving long-term commitments, just like a car rental company or a bank, and repackage them into shorter-term, small commitments, while managing risk and adding a bunch of value-added services.
I don't know about all this governance stuff or their growth rates, but on its face, that activity clearly DOES add economic value, and might be a viable business if executed well.
A REIT owns real estate assets.
WeWork doesn't need to own assets, they're an intermediary that does something economically useful.
The only company that can compete with the cable company at scale is usually the local phone company.
And yes, of course the strategy might work if there is a substantial network effect. But if there isn't, such as in the case of Uber, or WeWork, or even maybe Netflix, then the whole operation can only end in losses.
When you're the sole survivor, you have a lot of options. In Amazon's case, what they have is immense leverage over the whole supply chain. Amazon extracts higher margins from manufacturers, shipping, etc, etc. And they have enough influence that people pay them $80/year for the privilege of being a customer.
At this point, Amazon is riding on the momentum created from their previous habituation. They built up a (true) reputation for being incredibly cost competitive for the products they carried, and enabled minimally delayed gratification in the form of 2, 1, and same day shipping. Because of this, they became the retailer of first choice and people only went elsewhere if Amazon didn't have the product they wanted.
Then they widened their inventory to items that weren't as capable of being efficiently shipped in individual units with last mile residential delivery. They also shifted more and more to holding less inventory on their own books and having third party sellers fill that void. And then had to start collecting taxes nationwide so they could more easily build out their distribution network without tax-related geographic constraints. All of which led to more and more price inflation.
But Wikipedia says it best[1]:
"New behaviours can become automatic through the process of habit formation. Old habits are hard to break and new habits are hard to form because the behavioural patterns which humans repeat become imprinted in neural pathways,[7] but it is possible to form new habits through repetition."
As long as consumers default to Amazon, they'll never notice how uncompetitive some of their product pricing has become. And as long as Amazon's inventory keeps expanding and they get closer and closer to instant gratification from compressed delivery timelines, consumers will have little reason to look beyond Amazon and change their habits.
No, because at this point the barrier to entry is substantial. And, if a competitor does come in, the incumbent with a huge warchest can just drop the price again temporarily to drive them out.
Not really. Unless the product has a powerful network effect, people can easily enter. If that weren't the case, starbucks would have run every coffee shop out of business by now.
There's no money in it, because Amazon has such as HUGE advantage in mindshare, pricing and delivery that you can't compete.
Does a book store have a network effect? No. But it's hard to sell something for more than the dominant competitor without a compelling reason.
Somehow, she still finds a way to sell books and make some money, as well as highlight local authors and sell trail guides. The Barnes & Noble down the road, to be frank, seems to be her bigger headache.
Sure, but normal legitimate competition causes worse-performing competitors to close, so some distinction should be made between this supposed "predatory pricing until competitors shut down" strategy and the normal "cause competitors to shut down by simply being better than them" strategy.
If the question is, given a willingness to blatantly violate anti-trust law, and lose immense amounts of short-term for long-term gains, could Starbucks drive out all competition? And... I actually don't think they could, because (A) coffee shop patrons like variety and (B) I'm not clear that Starbucks could necessarily outlast e.g. Dunkin' Donuts.
Starbucks is just a poor example. Walmart would be a much better example.
There's a reason that we had to deal with monopolies largely through regulatory means, and it's not because we were afraid of letting the market correct itself, it's because, by and large, the market does not correct itself once a stable monopoly has been erected.
Once big (and profitable) enough, you can also just buy out any threatening competitor.
Lose on every sale but make up for it with volume.
:-)
No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out.
Relatively unregulated capitalism works OK when the product area naturally approaches a perfect market:
- Simple easily compared products - Consumers have easy access to accurate product information - Low startup cost for producers to enter the market - No costs for consumers to switch to a different producer
Very few markets actually resemble that. In order to keep non-perfect markets functioning efficiently, it takes a lot of strong, enforced regulation.
This is increasingly true as we transition to the Information Age where products are increasingly data and services. For those, network effects are powerful, which further entrench the dominant player.
> I'd assume the market would just corrects itself later?
How? "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.
For the larger company to do that, their losses would be correspondingly larger. This is why it's pretty hard to find a case history of this strategy being successful.
Neither is regulation. While it is true that "market failures" (imperfect markets) are common, it does not follow that regulation will improve them. In fact regulation usually makes things worse due to a combination of imperfect information (the regulators can't find out what they need to know to regulate efficiently) and regulatory capture (the regulators end up acting in the interests of the regulated industry instead of the consumers).