Further Thoughts on Predatory Pricing and International Trade

The other day, I wrote on predatory pricing (“dumping”) in the international trade market.  At Cafe Hayek, Don Boudreaux has additional comments.  Don writes:

There are many reasons to ignore allegations that private firms use so-called “predatory pricing” today as a means of monopolizing markets tomorrow – not the least of which is that there is no credible historical evidence of any such scheme ever actually being used to achieve genuine monopoly power for an alleged practitioner.  (By “genuine monopoly power” I mean the power of a firm to make consumers worse off than consumers were before the alleged predatory-pricing scheme resulted in the alleged monopoly power.)

Why is it genuine monopoly power is so unobtainable by a predatory pricer (for the sake of discussion, I am going to use the term “predatory pricing” both for domestic would-be monopolists and international “dumpers”)?  Here we must turn to our economic theory of monopolists.  A monopolist is a single seller who enjoys market power due to barriers of entry preventing other entrants into the market.  These barriers may be technological, geographical, or legal.  Since there are already participants the market (otherwise, the predatory pricer wouldn’t need to cut prices), we can determine the current barriers to entry are not so substantial as to prevent entry into the market.  This indicates that, even if the predatory pricer were to successfully drive out all current competition, future competition could come into the market as soon as prices rise to their monopoly level (this is especially true at the international level.  The world is a huge marketplace).

Another thing to consider is what happens to the competing firms.  These firms face two options when dealing with a predatory pricer: 1) compete on price or 2) shut down.  If they opt for #2 and shut down, their resources do not disappear.  They can either be sold to other competitors, new entrants into the market, or simply mothballed until the predatory pricer raises prices again and the firm can enter back into the market.

The above discussion should give us pause whenever we see some politician or special interest group complaining about “unfair price competition.”  It may very well be that the price is an accurate reflection of the firm’s costs and not a signal of some sinister pricing plot.