A classic Silicon Valley tactic – losing money to crush rivals – under scrutiny

Debt to scale up is one thing; operating for years operating/selling at a loss leading to ever increasing debt to choke out competitors and maintain a monopoly, fueling it with the expectation of a market valuation that will offset those losses, itself fueled by choking out those competitors, and all reliant on either getting out before it comes crashing down, or jacking up prices to profitable levels once there are no competitors left, is something else.

Isn't it a misnomer to call an anti-competitive practice a "competitive advantage"?

My own observations of this are that it only works in smaller areas where there isn't enough critical mass to support a lot of choice in markets.

Where I live, we have WalMart, Target, other national "big box" retailers, three different supermarket chains, and a pretty wide variety of locally-owned small specialty retailers.

Could a town of 10,000 support this kind of diversity in retail? No. So there, WalMart wins. Before WalMaret, there was more local retail, but they were barely making a living.

I wonder if mom and pop shops were not as economical.

I study consumer prices and I've found mom and pop shops are significantly more expensive than the big chains. I'm talking like 2x more expensive.

This is in suburbia where there are lots of competition.

Amazon too, right?

Its my understanding that walmart sells at discount prices, not sells at a loss. they have scale that local competitors do not. there's a huge difference

except walmart didn't operate at a loss in most cases. they figured out early on that they could operate profitably on the float between when they took delivery and sold items (usually a few days) and when they paid their suppliers for them (weeks, sometimes months, later). in effect, these were continual short-term zero-interest loans that, combined with predatory labor pay rates with socialized costs, often exceeded operating needs, so stores often generated profit entirely from finance rather than operations, and thus could offer cut-throat prices. it's become a classic business case study in cash flow management taught in business schools and employed quite sucessfully by other mega-retailers like carrefour in france.

There's already a law against predatory pricing. It just has a high burden of proof, isn't enforced, and the FTC's own website expresses skepticism that such a thing could ever really happen:

https://www.ftc.gov/tips-advice/competition-guidance/guide-a...

What is your solution? Should we just keep doing nothing?

I share your concern. In this era of cronyism and regulatory capture, the stated intentions of legislative efforts rarely seem to survive through the law-making process, no matter how laudable their origins. They get weakened, undermined, loop-holed or otherwise subverted. Even the recent "Right to Repair" efforts appear to specifically exclude things like mobile devices, PCs and consoles.

Seeing so many bills launched which appear to be so positive yet end up being either irrelevant or perversely damaging, has left me deeply skeptical anytime I hear another legislator announce some bill. The more I agree with the intent, the more I now just fear disappointment. The system is corrupt. Both major parties play these games and there is no longer a party I can rely on to be consistently better. Even when one party appears less bad, it's usually just that they promise things I find more agreeable, yet don't actually deliver when in power.

The issue seems, to me, that we're picking between propping up the incumbent (by preventing anti-competitive pricing) and propping up the competitor (with VC funds). Neither of these is a neutral choice, really. Competitors should win when they have a fundamental advantage like a technology jump -- switching because one company can temporarily price below the cost of providing service is not much of an improvement.

> Seems like the sort of scrutiny that would produce a well-intentioned law that will end up propping incumbents. Excited to be proven wrong though.

Maybe by itself, but it could be coupled with other laws designed to knock those incumbents down (e.g. by breaking them up), resulting in a better-structured and fairer market.

IMHO, the biggest tech giant should have their peripheral businesses broken off (e.g. separate Facebook and Instagram), and their main businesses should be further split to create well-matched peer competitors (e.g. Facebook Red, Facebook Blue, and Facebook Green).

I think that is classic Standard Oil.

It seems start-ups are different. When they do this they are not dominant. They are up and coming and attempting to leverage scale before competitors come and take their lunch (Uber, AB&B). At some point they cross the threshold and do become the dominant player, however, often not yet profitably. So the question is how to gauge that so as not to kill innovation but also to ensure other competitors aren't drowned.

Important to distinguish two types of loss-leader; this is a strategy that non-dominant companies in competitive markets use too, and all startups are in a sense running a loss leader until they get to break-even.

A loss-leader is not necessarily anticompetitive. It’s when you combine it with a dominant market position that the problems emerge.

My understanding is that EU antitrust law is more concerned with preserving competition as a benefit in itself for the consumer, whereas the US doesn’t think lack of competition in itself harms consumers, and requires you to show evidence of other harms before enforcing antitrust laws. The case of predatory pricing is a good example of where the US model tends to fail, and it seems like we are currently re-examining this regulatory philosophy.

This can occasionally backfire spectacularly. Consider the story of Herbert Henry Dow[1]:

> With his new company and new technology, Dow produced bromine very cheaply, and began selling it in the United States for 36 cents per pound. At the time, the German government supported a bromine cartel, Bromkonvention, which had a near-monopoly on the supply of bromine, which they sold in the US for 49 cents per pound. The Germans had made it clear that they would dump the market with cheap bromine if Dow attempted to sell his product abroad. In 1904 Dow defied the cartel by beginning to export his bromine at its cheaper price to England. A few months later, an angry Bromkonvention representative visited Dow in his office and reminded him to cease exporting his bromine.

> Unafraid, Dow continued exporting to England and Japan. The German cartel retaliated by dumping the US market with bromine at 15 cents a pound in an effort to put him out of business. Unable to compete with this predatory pricing in the U.S., Dow instructed his agents to buy up hundreds of thousands of pounds of the German bromine locally at the low price. The Dow company repackaged the bromine and exported it to Europe, selling it even to German companies at 27 cents a pound. The cartel, having expected Dow to go out of business, was unable to comprehend what was driving the enormous demand for bromine in the U.S., and where all the cheap imported bromine dumping their market was coming from. They suspected their own members of violating their price-fixing agreement and selling in Germany below the cartel's fixed cost. The cartel continued to slash prices on their bromine in the U.S., first to 12 cents a pound, and then to 10.5 cents per pound. The cartel finally caught on to Dow's tactic and realized that they could not keep selling below cost, they then increased their prices worldwide.

[1] https://en.wikipedia.org/wiki/Herbert_Henry_Dow

Facebook isn’t a dominant player in the newsletter business, so it seems like this wouldn’t apply?

Yeah, it feels like this should be illegal when done to expand into new markets by a profitable business.

Framing the law would be tricky though, as one doesn't want to criminalise high-growth (read: VC-funded) startups.

Doesn't Walmart do something similar when they open a store in a new area?

Just to expand on this, it's the sort of thing that sounds like it shouldn't work, because the competition can just wait you out and raise prices down the road too. But it can, because relative advantage is stateful and path-dependent. If you lay off skilled workers, cancel contracts, close factories, lose customer mindshare, and so on, that damage can be very hard to reverse even when favourable conditions eventually reappear.

Do you have any contemporary examples of this happening?

Seems like something that would be really easy to take advantage of by buying the material sold cheap and selling it later at a profit.

> and then raise prices to whatever it pleases.

I know that there is lots of theory on this, but has any company really ever gotten to this point?

We should be careful with definitions here.

Dumping, in the context of international trade, is very specifically a price discrimination rather than just an absolute price concept: it's where you export for cheaper than you sell domestically.

Why would a company with 90% market share crush it's own profit margins to drive a 10% competitor out of the market? They'd be losing $9 for every $1 they took from the little guy.

Open source naturally allows for competition. Look at Chrome, Google employed all these predatory practices to get Chrome to the market share it is today, but a significant amount of that market share is split between Chromium forked competitors.

I see what you're saying, but then I also don't share the author's viewpoint. That may have a little to do with it.

It is an interesting thought. What if you, as a company, create some open source that eliminates or genuinely competes with other companies?

When a large company has the resources to foot the bill on some project, and just give it away as open source because it is not a core product, is that just as bad as any of the article cases? Some FB, Google, Amazon, MS et al. tool could be someone's entire business.

Is it fair, open source or not, to release software for free, because you make money elsewhere such that you don't care about monetizing it? Is harming a competitors admissible if you literally never intend to directly profit off the endeavor?

Imo, this line of thinking really challenges the point of the article, I don't know where you draw that line. I feel it would be interesting to evaluate a real example, though admittedly I can't think of one on the spot.

i disagree. The US has arguably a better, larger, and cohesive economy.

Also EU talent comes to the US because EU companies just dont value their tech workers as much. EU has to pay tech workers more, or else it will loose in tech, 100%.

Lastly, there's regulation and taxes that makes it hard for businesses to develop.

Only a part. In Europe you could not even become big, each country is too much its own market. It sis much much harder, or even impossible, to build a large company for all or even only for many European countries compared to building one for the entire US.

I worked for a German IT (software) startup in Germany and also in the US, for that startup and before that for another large German company. We found that getting started in Germany was easier compared to the US, where the "winner takes all" mentality was also visible on the side of potential customers, so entrance into the market was hard(er). In Germany getting initial customers for unproven stuff was pretty easy in comparison.

The problem is the switch from initial customers to scale. What made it easy to get started made it hard to achieve scale. When you get to a certain size and "fame" you get a big share of the entire US market. In Germany, but I think I can extrapolate to Europe, from what I experienced, the buyer side does not have a similar tendency to favor large already-winners and get them to become (European) champions.

It's maybe not exactly completely valid examples, but I like them as illustrations: coffee machines or phones. In Germany (never mind Europe) even within the same company I found completely different phone systems and desk phones in different buildings (same with many other small parts). In the US, where I was sent to many big companies, I saw much less variety. Same with coffee machines, where every single department often has a different machine. In the US, more of the same wherever I went.

I'd be interested what you guy think about my coffee machine and phone (and phone system) observations, if you have relevant experience. I saw this as a sign how buyer forces in the different countries (EU as a country) supports more but much smaller variety vs. fewer but large winners, but wasn't sure with my small sample.