A company has several units of old-model telephones that it is selling for 10 per unit. The uni

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A company has several units of old-model telephones that it...

Key Concepts

Business Strategy Considerations

Beyond merely setting a low price, it is important to evaluate the strategic purpose behind such pricing decisions. Companies might price older or obsolete products below cost as a means of clearing inventory, transitioning to new models, or segmenting their product lines. Therefore, determining whether low pricing constitutes predatory pricing requires an understanding of the broader business goals and market context.

Predatory Pricing

Predatory pricing is a strategy where a company deliberately sets its prices below cost with the primary goal of driving competitors out of the market. The idea is to create unsustainable losses for rivals, reducing competition, and then raising prices later once the competition has been eliminated. Assessing whether pricing is predatory involves not only comparing price to cost but also considering the intent behind the pricing decision.

Cost Structure

The cost structure of a product—detailing the production, procurement, or other related costs—is essential for understanding the pricing strategy. When a product is sold significantly below its production cost, it raises questions about whether this is a short-term tactic to clear old inventory or a deliberate strategy to undercut competitors. This concept helps frame the analysis of pricing strategies in relation to profitability.

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