Competition drives innovation, improves quality, and most importantly, lowers prices for consumers. Yet when foreign companies — particularly Chinese firms — successfully compete on price, accusations of “predatory pricing” or “dumping” often follow. These charges deserve scrutiny through a lens of economic rationality, rather than through the fog of hazy protectionist thinking.
Predatory pricing occurs when a firm deliberately sets prices below production costs with the intent to drive competitors out of business. Once this goal has been achieved, the predator can theoretically raise prices to monopolistic levels and recoup earlier losses. The strategy sounds plausible in theory, but it is much harder to pull off in practice.
Such concerns aren’t new. For decades, American industries have pointed to low-priced foreign goods as evidence of unfair trade practices. In the 1980s, Japanese manufacturers of electronics and automobiles faced similar accusations.
Yet for all the alarm about predatory pricing, examples of its success remain surprisingly scarce. The most cited case — the Standard Oil Company during the early 20th century — has long been known by economists to be false. The truth is that Standard Oils’s low prices reflected its low costs.
Why does predatory pricing so rarely succeed? Basic economic principles provide several explanations.
First, predatory pricing imposes significant costs on the predator itself. Selling below cost generates immediate losses that can quickly accumulate to unsustainable levels, especially in capital-intensive industries. These losses are certain and immediate, while any potential monopoly profits are speculative and distant.
Second, competitors can often weather temporary price wars by accessing capital markets. If investors recognize that a company is competing against a predatory pricer, rather than suffering from fundamental business flaws, they have incentives to provide financing to enable survival through the predatory period — especially because the firm that loses most during the predatory period is the predator.
Third, even if a predator succeeds in driving competitors out of the market, the resulting monopoly position proves difficult to maintain. Once prices rise to profitable levels, new entrants are attracted into the market — entrants that oblige the predator to lower its prices.
Fourth, global competition makes market dominance increasingly difficult to achieve. If Chinese manufacturers drive American companies out of business, then European, Korean, and Indian competitors remain. True monopolization today would require successful predation against all global competitors simultaneously — an economically ruinous proposition.
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