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Problem 20

If public utilities are a natural monopoly, what …

Problem 19

What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it
should be illegal?


Antitrust laws are the laws and regulations that are imposed by government or authorities to
ensure the increased competitiveness in the market. It also helps observe and control mergers
and acquisition taking place between big or key firms.
Predatory pricing is pricing strategy where the pricing of the good is kept by the firm solow that it
becomes diffivive in maxrpettion to sell and survive at that such low prices. Now when firms are
not able to survive in market because of such low price then they need to exit the market and
compettivenss of the industry reeuces. But it is very difficult to tell the difference between
predatory pricing or low pricing due to high competition because the effect of both the reason is



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Video Transcript

this likable, predatory pricing. Predatory pricing is simply the cutting down of prices. When a new firm interests a market. For example, let's say we're looking at a car company, and let's assume that GMC is the only car company in the world. Okay, um imitated a new a new firm wants to enter this market and producer on Carson solidity consumers well, GMC, since being the only firm in being rather large, is going to be able to decrease their prices toe a level where the new firm might not be able to compete. That's just an example of predatory pricing, But it's actually really hard to know why a firm might be cutting prices. Because again, if we have competition, we do expect prices to go down. So when exactly do we draw the line and say, Well, this is predatory pricing. Some economy ist can claim that if you charge her price below your average variable costs, which technically is a shutdown price because you're making losses, then let's go see their predatory pricing. And why would a firm do that? Well, affirm? I decide to incur some losses right now if it can keep making positive profits in the future. So it's kind of like saying, Well, I don't want this firm to enter my market and take my profits so I will incur a loss to make sure that I kicked them out to make sure they go bankrupt. Um, but even then, even if we have that cut off, it is really hard to know. Affirms average variable costs. We're not really sure whether variable costs as we don't know what they're fixed costs are. So actually pinpointing predatory pricing practices is rather difficult in the real world.

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