the myth of predatory pricing

Those who like to argue for government involvement in the market like to claim that monopolies will keep out competitors by lowering their price, driving out newcomers, and then raising their price to gouging levels. Not only is there no real historical examples of this (after all Standard Oil kept lowering prices without ever raising them) but counter-examples are commonplace.

One such example (and one I love), is the example of Bromine in the 1900s. Herbert Dow discovered a better manufacturing process for Bromine and broke into a market that was dominated by a German price-fixing cartel. Bromine was selling in Europe for 49 cents per pound and whereas Dow’s Bromine in America was priced at 36 cents per pound.

Then one day, Herbert Dow, being the fine philanthropist he was, decided that the consumers in England had spent too much time being shafted by the Germans. He began selling in England, and the Germans, doing what German’s do best, decided to lash out. As a repercussion, they flooded America with Bromine priced at 15 cents (remember the market value was at 36 cents). They wanted Dow to feel their wrath and be driven out of business.

Dow, seeing that the new products were under-priced, began buying as much as he could, repackaging it and selling it in Europe at 27 cents per pound. Not only was the cartel losing money in the American market, but they were also being under-priced in the European market. After the Europeans figured out what was going on, their little predatory pricing scheme fell apart. They came to an agreement with Dow for him to stay clear of Germany, them stay clear of America, and to mutually compete in the rest of the world.

Predatory pricing does not work. For every cartel, there is 100 speculators. Firms have no choice but to price at a natural market equilibrium price.

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
This entry was posted in Economics, History and tagged , , , , . Bookmark the permalink.

One Response to the myth of predatory pricing

  1. Pingback: predatory pricing and public schools | reality is not optional

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