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Also known as undercutting, is a pricing strategy where a dominant firm deliberately reduces prices of a product or service to loss-making levels in the short-term.
The aim is that existing or potential competitors will be foreclosed from the market, as they will be unable to effectively compete with the dominant firm without making a loss.
Once competition has been eliminated, the dominant firm can then raise prices to monopoly levels in the long-term to recoup their losses.
Predatory pricing can cause consumer harm so is considered anti-competitive in many jurisdictions and is illegal under some competition laws.
Predatory pricing can be split into two stages.
Firstly, there is the predation stage, where dominant firms offer a good or service at a below-cost rate which reduces profits in the short-term, but is intended to price out competitors from the market.
Secondly, there is the recoupment stage, where dominant firms charge monopoly prices in the long-term to recover their losses. Under EU law, the European Commission can account for recoupment as a factor in determining whether predatory pricing is abusive. This is because predatory pricing can only be economically effective if a firm can recover its short-term losses from pricing below average variable costs (AVC). However, recoupment is not a precondition for establishing whether predatory pricing is an abuse of dominance under Article 102 TFEU. Assessing other factors, such as barriers to entry, can suffice to prove how the predatory pricing could foreclose competitors from the market.