Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce its prices of a product or service to loss-making levels in the short-term.
The aim is that existing or potential competitors within the industry will be forced to leave the market.
> 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.
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.
I think it's quite widely understood by economists and legislators that it can work; the Wikipedia article up-thread gets fairly technical, e.g. https://en.wikipedia.org/wiki/Predatory_pricing#Long_term_co.... You can absolutely loss-lead a competitor out of business if you have a bigger pile of cash, and then raise prices higher.
Perhaps facetiously, I'd suggest the question can be more succinctly answered by saying if it didn't work, then large companies probably wouldn't do it.
Or is the question about whether or not this is a failure of regulatory framework?
I am not sure about that. There's a lot of consternation about this currently, many people think that there are serious long-term harms currently being inflicted. The fact that Biden picked a strident anti-trust advocate like Khan to head up the FTC suggests that there's political support for the case that there's active harm going on right now, as well.
The article provides a few concrete examples, and while I think Amazon is sometimes unfairly treated in the press, this is a case that I find quite troubling:
> In 2009, when Amazon noticed an e-commerce upstart called Quidsi making inroads with a subscription business aimed at parents, Diapers.com, Amazon made a bid to buy it — while launching its own subscription service, Amazon Mom, that offered even steeper discounts. Documents later revealed as part of an antitrust investigation reportedly showed Amazon was willing to lose $200 million in a month on diapers alone to neutralize the threat Quidsi posed. Quidsi gave in and sold to Amazon in 2010.
And on the core point of the article, whether Facebook Bulletin is an example of predatory pricing -- I think that the FTC doesn't understand social networks, made a huge mistake allowing FB to buy Instagram, and the current regulatory framework doesn't work for social networks.
Zuckerberg understands social networks. As he put it:
"There are network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different.
“One way of looking at this is that what we’re really buying is time. Even if some new competitors springs up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.”
Through this lens we can analyze Facebook's strategy. Zuckerberg (correctly, I believe) thinks that it needs to win in each of the finite number of "social mechanics" that will be invented in order to maintain dominance over these modes of sharing. If it can't buy competitors in these spaces, it will create clones and run them at a loss to prevent them from taking off. Hence "Bulletin"; copycats are in some sense inevitable, but if FB undercuts Substack on their platform fee and/or overbids for content creator contracts, then they could drive Substack's valuation down and ultimately acquire them, just like Amazon did to Quidsi.
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.
Debt financing to expand is one thing; debt financing to expand when you currently aren't making a profit, and you don't have a business model to make a profit after expansion except "choke out competitors so you have a monopoly and can raise prices to profitable levels" is anti-consumer.
What exactly was the benefit that happened after the break up?