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1. Predatory pricing

What is predatory pricing?

Offering low prices to consumers for example by giving out discounts, cutting costs and otherwise competing on prices is the epitome of competitive conduct. However, if an undertaking with substantial market power sets prices so low that it deliberately foregoes profits in order to force one or more other competitors out of the market, this may amount to predatory pricing.

 

[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.3-5.4]

 

How could predatory pricing harm competition?

Generally speaking, an adverse effect on competition will arise where there is or likely to be anti-competitive foreclosure of existing competitors or new entrants. In the short run, the undertaking with substantial market power which set the below-cost prices may incur losses; however, in the long run, it would be able to charge higher, supra-competitive prices once it has forced other competitors out of the market. In this scenario, consumers will ultimately be worse off due to weakened competition leading to higher prices and reduced product quality and choice.

 

[Source: Commission’s Guideline on the Second Conduct Rule Para 5.4]

 

Hypothetical example

KowloonVend Ltd and New Vending Co are the only two companies that sell vending machines in Hong Kong. KowloonVend has the majority of vending machine sales, while New Vending, a recent entrant in the market, has a much smaller share. KowloonVend was selling its machines at a highly profitable price. When it entered the market, New Vending began selling its machines at a much lower price and KowloonVend’s market share began to decline. New Vending gained these lost sales from KowloonVend. In response, KowloonVend cut its prices in half. This low price is not enough to cover any measure of KowloonVend’s costs and KowloonVend loses money with each vending machine sold. New Vending cannot compete with these low prices and eventually goes out of business.

 

Assuming it can be established that KowloonVend has a substantial degree of market power, the Commission may assess KowloonVend’s conduct as predatory and a contravention of the Second Conduct Rule. The conduct might also be considered as having the object of harming competition.

 

[Source: Commission’s Guideline on the Second Conduct Rule Example 5]

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