Why is predatory pricing a strategy for firms with market power?

Predatory pricing is a strategy for firms with market power to eliminate competition and strengthen their market dominance.

Predatory pricing is a strategy where a firm with significant market power sets its prices very low, often below its own cost of production, with the intention of driving its competitors out of the market. Once the competition has been eliminated, the firm can then raise its prices and enjoy higher profits. This strategy is often used by firms with significant market power, as they have the financial resources to sustain losses in the short term.

The rationale behind predatory pricing is based on the concept of economies of scale. Firms with market power often have larger operations and can therefore produce goods at a lower cost per unit than their smaller competitors. By lowering their prices, they force their competitors to either match these prices or risk losing market share. Smaller firms, unable to match the lower prices without making losses, may eventually be forced to exit the market.

Moreover, predatory pricing can also act as a barrier to entry for potential new competitors. The threat of a price war with a dominant firm can deter new firms from entering the market, thereby preserving the market power of the existing firm.

However, it's important to note that predatory pricing is considered anti-competitive and is illegal in many jurisdictions. It's seen as harmful to consumer welfare in the long run, as it can lead to a monopoly or a market with less competition, which can result in higher prices and less choice for consumers.

In conclusion, predatory pricing is a strategy used by firms with market power to eliminate competition and strengthen their market dominance. It relies on the firm's ability to sustain short-term losses and exploit economies of scale, but it's often seen as harmful to long-term consumer welfare.