Predatory Pricing as a Business Strategy - Essay Example

?Critical Analysis Table of Contents Critical Analysis Table of Contents 2 Introduction 3 Focus 4 Analysis 5 Conclusion 8 References 9 Bibliography9 Introduction The era of globalisation and competition has led to a situation of intense market competition. Business organizations are getting engaged in price wars that have severely eroded the bottom lines of business organizations. Firms in highly competitive environment are looking to attract new customers by competing on the basis of pricing strategies so as to gain an edge over their competitors. Predatory pricing is one such strategy that is being used by business organizations across the globe. Predatory pricing involves a strategy in which a firm sells its products at lowest possible rates below the offerings of all the competitors so as to grab the market share of the competitors on the basis of competitive pricing (Denger, American Bar Association & Section of Antitrust Law, 1991, p.3-3). This use of this strategy by business organizations to gain market share and take care of the competition in the market has been questioned by numerous authors and various academic and professional circles. The aspect has been so serious that governments across the world have set up competition policies and also appointed watchdogs to supervise and monitor the competitive strategies so as to maintain a healthy competition in the consumer market. Individuals in favour of predatory pricing state that pricing is an integral part of a company’s unique selling proposition and hence freedom must be given to ensure fair balance in the market. It is also in coherence with the free market policy that seeks equal opportunity for all and survival of the fittest. Proponents’ however have slammed this move by stating that predatory pricing ultimately does not help customers in the long run but leads to closure of firms that generates unemployment that can have drastic effects on the total economic scenario of a market. The present study would undertake a critical analysis of the aspect of predatory pricing so as to analyse the actual implications and the pros and cons of this increasingly popular business strategy adopted by corporate across the world. Focus The aspect of predatory pricing has been a subject of debate among academic and professional circles. An article by Gundlach & Guiltnan (1998) states that predatory pricing is an unethical aspect that does not being any benefits in the market. They have argued that a marketer indulging in predatory pricing strategy tends to reduce the price of the product or service in an attempt to maximise its market share by eating away a chunk of the market share of its competitors. Predators however on the achievement of their objectives of either dislodging their competitors or after gaining a significant market share tend to again increase the prices. Ultimately the customers bargaining power gets considerably reduced in the process. The dislodgement of competitors from the market gives a monopolistic power to the predator that is against the rules of competition and ultimately leads to unhealthy market situation. The authors have stated that the predatory pricing as a competitive strategy has been quite unsuccessful in the past and courts have also pronounced verdicts in famous cases like Brooke thus affirming the faith that predatory pricing is perhaps a negative strategy that has no ultimate benefit to any section of the society or the business world (Gundlach & Guiltnan, 1998, p.884). The views of Gundlach & Guiltnan (1998), however have been refuted by authors like Bolton, Brodley & Riordan (No date) as they have stated that predatory pricing is an integral part of a business strategy of an organization and competing on the basis of cost is normally an outcome of a business’s efficiency to provide products at low prices due to certain organizational efficiency. The authors have slammed the views of critiques advocating the court legislations on cases like Brooke where they have pronounced verdicts against predatory pricing. The authors have stated that courts are largely irrational and have relied only on theoretical aspects to pronounce verdicts against predatory pricing. Furthermore they have also stated that there have been no instances of a predatory pricing being unsuccessful in the past thirty years leading to a conclusion that such a strategy is perhaps an integral part of business strategies used by corporate in a perfectly competitive market environment in order to maintain competitive edge and maintain sustainability (Bolton, Brodley & Riordan, n.d., p.1-5). Analysis Gundlach & Guiltnan (1998) have focussed on four key aspects in their study on predatory pricing, that include analysing the rationale of managers behind this strategy, availability of information and outcomes in a long term, ethical aspects and finally analysing the benefits of consumers and society in particular. After a research the authors have stated that the core issue lies in the conflict of interest and views with the traditional and market oriented school of thought. The authors have hailed the traditional school of thought that states that predatory pricing only tends to maximise profitability and these strategies are only being done by risk averse marketers (Gundlach & Guiltnan, 1998, p.884). Bolton, Brodley & Riordan in their study on predatory pricing have stated that this form of pricing does not lead to elimination of competition in the market as there are chances that the predator due to irrational strategies can fail in its strategy. They argue that predatory pricing is essentially a competitive phenomenon and firms can only resort to this strategy on the basis of some internal skills and competence. Terms like economies of scale and scope are broad indicators of this fact and that firms only after gaining core competence on certain aspects can help generate the capability to induce such a strategy in the market. Customer welfare therefore is not normally affected as a predator can no longer rule a market on the basis of cost and there are many ways other players can survive in the market. The case of existence of low cost carriers and full time carriers is a classic example in this regard. It can be observed that low cost carrier’s business model is based on the aspect of providing air travel at very cheap rates; however legacy carriers have also survived side by side by providing better value additions in form of better facilities to counter the threat from the low cost carriers. This largely shows that in a perfectly competitive market driven economy pricing alone cannot eliminate the other players and does not have a negative influence on the market as stated by the advocates opposing the aspect of predatory pricing in the market (Bolton, Brodley & Riordan, n.d., p. 5-10). The aspect of the predator marketer making initial losses as a part of the predatory pricing strategy has also been refuted by authors who have stated that as long as the unit cost of the predator is less than the unit cost of the rivals, the short term losses can be offset by the long term gains. It has also been stated that if the predator is able to successfully raise prices after removing its rivals, then the profit margins that would be generated post removal of competitors would have a better value to the firm. In other words the concept of time value of money would ensure that the company’s long term cash flows would be profitable even in the short term and the resources spent during predatory pricing could be easily recovered (Sullivan, American bar Association & Section of Antitrust Law, 1991, p.9). These claims have been totally rejected by Dabbah (2004) who has quoted the findings of a legal committee on this aspect and has stated that predatory pricing is illegitimate and leads to development of unhealthy practices in the market. It has also claimed that marketers undertaking a predatory pricing can be successful only when they exorbitantly raise prices after the exit of their competitors from the market. On a whole the aspect of predatory pricing as stated by the author leads to an overall dip in the economic growth as firms largely cannot maintain profitability and cannot even recover their costs during the period of providing products or services at very low rates (Dabbah, 2004, p.369-370). Koller (1978) stated that marketers undertaking a predatory pricing strategy normally have an objective of either monopolising the market by forcing the competitors to exit or to induce cartelisation that would help them control the market entirely. Both these two objectives are known to promote negative feelings and do not induce a healthy competition in the market. Ultimately it is the customers who are negatively affected as an outcome of this strategy as their bargaining power gets considerably reduced. This is an unhealthy practice and leads to monopolisation of a market with little or no value addition. It is perhaps this aspect that has forced governments across the world to create antitrust bodies that aims to foster a healthy competition in the market (Koller, 1978, p.4-6). Salinger (2004) conducted a research onto the aspect of predatory pricing mechanism adopted by business organizations and stated that predatory pricing can essentially be undertaken by an organization that has access to huge financial resources and the ability to sustain initial losses. The author also linked this to the aspect of dumping and tying strategies that are mainly used by foreign companies to make an entry into the new market on the basis of cost (Salinger, 2004, p.414). The light of discussion essentially shows many facets of the aspect of predatory pricing. It is clear that predatory pricing is one of those strategies that if successfully implemented can lead to a sustainable advantage for any organization. Conclusion Predatory pricing as a business strategy has been a subject of debate with various academic and professional circles. Advocates of this strategy such as Bolton, Brodley & Riordan state that predatory pricing is a part of the competitive strategies and there is no unethical aspect involved in it. However authors like Gundlach & Guiltnan (1998) have termed predatory pricing as unethical and unviable for business organizations. It can be concluded from the study that predatory pricing as a competitive strategy cannot be entirely dubbed as unethical as this strategy can be only implemented successfully if the competitors are weak. Hence it cannot be termed as entirely unethical or illegal as it is an outcome of a firm’s competitive advantage over its internal resources. In order to stay competitive it is necessary to focus on customer and create a unique positioning that would help firms to successfully thwart any attempt by a predator to capture and monopolise the market. Hence ensuring business and organizational efficiency is the right strategy that can help drive business organizations and help them maintain profitability and sustainability. References Bolton, P., Brodley, J.F. & Riordan, M.H. (No date). PREDATORY PRICING: STRATEGIC THEORY AND LEGAL POLICY. [Pdf]. Available at: http://www0.gsb.columbia.edu/faculty/pbolton/PDFS/BBRPrincetonDP.pdf. [Accessed on November 2, 2011]. Dabbah, M.M. (2004). EC and UK competition law: commentary, cases and materials. Cambridge University Press. Denger, M. L. American Bar Association & Section of Antitrust Law. (1991). Federal and state price discrimination law. American Bar Association. Gundlach, G.T. & Guiltnan, J.P. (1998). A Marketing perspective on Predatory Pricing. [Pdf]. Available at: http://www.unf.edu/~ggundlac/pdfs/pub_34.pdf. [Accessed on November 2, 2011]. Koller, R.H. (1978). Predatory pricing in a market economy. Ayer Publishing. Salinger, L.M. (2004). Encyclopedia of White-Collar & Corporate Crime, Volume 1. SAGE. Sullivan, E.T., American bar Association & Section of Antitrust Law. (1991). Nonprice predation under Section 2 of the Sherman Act, Volume 18, Issue 4. American Bar Association. Bibliography Ferrell, O.C. & Hartline. M. (2010). Marketing Strategy. Cengage Learning. Griffin, R.W. (2008). Management. Cengage Learning. Hill, C. W. L. and Jones, G. R. (2007). Strategic Management: An Integrated Approach 8th ed. 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