Beware of predatory pricing

May 17, 2021

Written by: Eric Barzelogna

3 min

Beware of predatory pricing

As we know, your cost and your pole sign price are key variables for your business.

Gas stations compete. And one of  the levers they use to win customers is price.

So what happens when a competitor tries to manipulate the market to beat out the competition? This is called predatory pricing.

Predatory pricing can be defined as charging a price so low that the competition prefers to quit rather than compete. As a result, the company can then charge higher prices in the medium-to-long run because the most competitive rivals have been forced to exit the market. 

This is tough to regulate. Many believe that regulations to control this type of behaviour can lead to the market becoming distorted and the destruction of true competition. 

And consumers do not perceive what is happening until it is too late. They love the low prices. Why would they question it? A consumer is a short-term thinker, excited about today’s bargain and not familiar with market dynamics.

To better understand this kind of price abuse, let’s use an example.

I, as the owner of Gas Station “EricPetrol” decided to do a nice initiative where I offer a pizza slice with every 10 gallon fill up. I am making a smaller margin than usual and increasing brand awareness, but at the same time ruffling some feathers of bigger competition in the area.

Now let’s imagine that my competitor down the street, “NotEricGas” has a very big market share in the fuel industry and is perceived as a major player in the area. They may decide to do a similar initiative and engage in healthy competition. Nothing wrong with that.

But what if This bigger competitor perceives us as a major threat to their market share?

Here predatory pricing may come into play and NotEricGas decides to offer the whole pizza with a 10 gallon fill up. This becomes predatory pricing as the company is losing money and offering this initiative below the cost to do so with the sole intention of eliminating competition (in this case the amazing- but small- EricGas).                           

This example may seem trivial, but it is one of the main reasons why predatory pricing is illegal in most European countries and extremely controversial is the US. 

Generally, authorities fear intervening on predatory pricing because, on one hand, doing so can bring forth serious consequences and inhibit price competition in an industry. On the other hand, if predatory behavior is not recognized and is considered as competition, a firm can increase its market power and will eventually increase prices unpredictably in an industry throughout the long run effectively dominating it.

In other words, if a company sells products “at a loss”, it becomes a loss leader and pushes competition out of the market, because these weaker companies don’t have the economic power to stay alive by selling below profit. This is why- for example- the law states you cannot sell below cost in New Jersey (conversely surge pricing is regulated and you can only make a price change once a day).

At present there is no evidence of this practice occurring, but with increasing Market consolidation in the US (and elsewhere) this could be something to keep an eye on. 

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