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What is meant by predatory pricing?

What is meant by predatory pricing?

Solution

Predatory pricing (also called undercutting) is the practice of deliberately setting a price below a rival's price — even below average variable cost — to drive competitors out of the market.

  1. Aim: to eliminate or weaken rivals and build monopoly power once they have exited.
  2. Effect on consumers: buyers gain from the very low prices in the short run, but lose later when competition is destroyed and the surviving firm raises prices.

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