What it means
In normal competition, firms cut prices to win customers and survive on their own efficiency. Predatory dumping is different because the price is set deliberately so low that it makes a loss, and the loss is accepted as an investment.
The aim is to drive out competitors, discourage new entrants and gain control of the market. The tactic works best for a firm with deep pockets, such as a large producer that can fund losses with profits elsewhere.
A smaller competitor cannot survive months of selling below cost. When it exits, the dominant firm is free to increase prices and recover the earlier losses.
The term is most often used in international trade, where a foreign producer exports goods at prices below those charged in its home market or below its costs. Governments may respond with anti-dumping duties, which are extra tariffs on the imported goods.
Competition authorities may also investigate if they suspect abuse of market power. Proving it is hard, because lawful price cutting looks very similar.
Authorities usually need to show that prices were below an appropriate measure of cost and that the firm had a realistic chance of recouping its losses afterwards. Aggressive pricing alone is not illegal, since low prices often benefit customers.
For a manager, there are two angles. If you suspect a rival of dumping, keep careful records of prices and market changes and seek legal advice.
If you are the one pricing aggressively, make sure there is a genuine commercial reason such as scale economies, and document it. Smaller businesses can respond in practical ways as well as legal ones.
They can differentiate on service, quality or speed so that price is not the only reason customers buy, and they can seek long-term contracts that lock in volume. Industry associations often coordinate complaints, which spreads the cost of gathering evidence.
In practice
Real-world examples.
Example
A foreign steel producer ships products to a local market at prices well below its production cost. Domestic steelmakers complain to their government, which investigates and imposes an extra duty. The imported price rises to a level closer to the cost of production.
Example
A large online retailer sells a popular gadget at a steep loss in one city to push out a small local chain. The chain files a complaint, and the competition regulator looks at whether the retailer can later raise prices. The case turns on evidence of that intent.
Example
A software vendor gives away a rival product's equivalent for a year, funded by profits from its other lines. Smaller vendors lose customers and some close down. Analysts debate whether the move was fair competition or predatory behaviour.
Formula
Calculation
Loss per unit = cost per unit - selling price per unit; total sacrifice = loss per unit x units sold.
A large producer has a cost of $12 per unit but sells 500,000 units at $8 per unit to undercut local rivals. The loss per unit is $12 - $8 = $4. Total loss = $4 x 500,000 = $2,000,000. If rivals exit and the producer can then raise its price to $15 on 400,000 units, it earns $3 profit per unit, or $3 x 400,000 = $1,200,000 a year, so it would recoup the loss in under two years. The calculation shows why the tactic only makes sense with deep reserves and a realistic chance of keeping rivals out: the producer must be able to fund $2,000,000 of losses and then hold prices high enough that new entrants do not return. If a rival re-enters at $9, the expected $1,200,000 yearly profit would quickly disappear.Case study
Seen in the real world.
Ironvale Cement is a fictional producer used here for illustration. A larger neighbouring company began selling cement in Ironvale's home region at 30% below its own production cost.
Ironvale's management documented the price history, the costs of the competitor and the loss of customers. With a lawyer, it submitted the evidence to the trade authority as a complaint of dumping.
In the illustrative story, the authority concluded that the prices were below cost and that the competitor intended to recover the losses later. It imposed temporary duties, which gave Ironvale time to stay in business.
Watch out
Common mistakes.
- Calling any price cut dumping. Lower prices from efficiency, scale or promotions are normal competition and usually legal.
- Assuming the practice always hurts consumers immediately. In the short run, customers often enjoy lower prices, and the harm comes if competition disappears afterwards.
- Believing that proving below-cost pricing is enough. Authorities usually also look for a likelihood of recovering the losses later.
Questions
People also ask.
What is an anti-dumping duty?
It is an additional tariff placed on imported goods that are sold below fair value, intended to restore a level playing field.
Why do firms use predatory pricing?
They hope to gain market power, which lets them raise prices and earn higher profits once competitors leave.
How can a business protect itself?
Keep detailed records of prices and lost sales, build customer loyalty and talk to a competition lawyer early.
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