Predatory pricing is when one organization under-prices their goods or services at below cost in order to drive competition from the field. This is seen by many laymen as an effective tool that works to build monopolies. Without any concrete examples, this myth persists.

Bryan Caplan recently posts an excellent article explaining that even in a zero priced predatory pricing scheme, competition still cannot be driving from the market. His example is public school, which offers schooling for free. Even with a zero price point for the consumer, government schools still only capture only 90% of the market:

After practicing predation to the utmost degree, public schools have only captured 90% of the market.

This is particularly striking when you realize that public schools – unlike normal businesses – can afford to practice predation indefinitely. When a normal business practices predation, competitors naturally wonder, “How long can the predator keep this up?” For private schools, in contrast, there is no light at the end of the tunnel. They keep serving 10% of the market even though they know in their bones that public schools’ predatory pricing will continue without interruption.

My favorite example of an attempted predatory pricing scheme is of bromine in the 1900s.