When is the Price Right: Predatory Pricing and Small Businesses

Date: Jul 02, 2010
Document Type: Newsletter

"Let's hear it for the little guy." "Underdog." "Small fish in a big pond." "It's not the size of the dog in the flight but the size of the fight in the dog." "A real David and Goliath."

These are common phrases to describe small businesses and the overall market. There are also common legislative provisions to prohibit actions that unfairly damage small businesses, such as predatory pricing laws.


Laying down the law on predatory pricing

Predatory pricing is unlawful under s 46(1) of the Trade Practices Act 1974. This prohibits businesses that have substantial market power from using that power to eliminate or damage a competitor. It also prohibits preventing a person from entering a market, or deterring or preventing a person from engaging in competitive conduct in a market.


What is predatory pricing?

Predatory pricing occurs when a company sets an unrealistically low price for the purpose of forcing a competitor to withdraw from the market. Such actions would leave the company with less competition, thus able to disregard market forces, raise prices and exploit consumers.

Price cutting or underselling competitors is not necessarily predatory pricing, but when such techniques are used by a business with substantial market power for the purpose of getting rid of competitors, it is considered to be a misuse of market power.


When does predatory pricing occur?

Predatory pricing can only happen when the price setter has a substantial degree of market power. A business has substantial power when its activities are not significantly constrained by competitors, suppliers or customers.

The intention of the price cutting must be shown to eliminate or substantially damage a competitor, prevent the entry of a person into the market or deter or prevent a person from engaging in competitive conduct in a market. It is this clear purpose that turns price cutting by a company with substantial market power into predatory pricing.

Once competitors are eliminated the likely results are that the company can raise its prices, recoup its losses, and exploit consumers.


Proving predatory pricing

The initial signs of predatory pricing are pro-competitive. Often, there is no written evidence of anti-competitive purpose to prove an allegation.

Bodies, such as the ACCC, regulate alleged predatory pricing and encourage concerned businesses to act and contact it.

It is highly recommended to seek legal advice when drafting any type of allegation of predatory pricing. Financial and legal obligations, and court proceedings may ensue.

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