Examples of predatory pricing
Predatory pricing is nothing new. Even before Aristotle first coined the term “monopoly,” companies all over the world have practiced predatory pricing. To find out how the initial benefits of predatory pricing inevitably turn into drawbacks, we looked at some examples.
1. The WalMart/Target drug war
A prime example of predatory pricing tactics between two large franchises can be seen in the prescription drug price war between Walmart and Target in Minnesota.
Walmart, seeking to undercut the competition, initially began offering certain prescription drugs at well below its price floor. Set by the government, a price floor is the lowest price that goods or commodities can be legally sold at based on the minimum cost at which turning a profit is still possible. Target, looking not to be undercut, matched these drug price cuts. However, Minnesota state law forbids the sale of drugs below their stated cost and limited the discount, thus putting an end to the price war.
2. The Darlington Bus War
Sometimes businesses are willing to price so low that they offer their product or service for free, as seen in the Darlington Bus War. Following the deregulation of buses in 1986 in the United Kingdom, a number of private companies began to compete over the demand for public transport. One company, Busways, began offering free rides to put its rival DTC out of business, with the intent of cultivating a monopoly in a given market. A commission, formed to investigate their activities, called Busways’ actions “predatory, deplorable and against the public interest.”
DTC indeed was put out of business, and Busways was then acquired by an even larger company, Stagecoach. However, Brian Souter, the chairman of Stagecoach, later admitted that the negative impact of the company’s predatory strategy had outweighed the financial gains made by monopolizing the Darlington area.