In Policing Corporate Pricing Policies, Stephen Crockett calls for strict new federal laws against price-gouging and predatory pricing. According to Crockett

We all know about price-gouging. We see it everyday when buying gasoline, diesel fuel, home heating oil, prescription drugs and many other products or services.

He must not have been paying attention earlier this year when first the Cato Institute and then the Federal Trade Commission and the Antitrust Division of the Justice Department released studies finding no evidence of price gouging by the oil companies. I'm pretty sure Stephen Crockett will casually dismiss Cato as a bunch of libertarian shills for the big oil companies, but the FTC & Justice Dept. report should prove more problematic for him. If the agencies that would be responsible for enforcing his draconian regulations don't see any evidence of wrongdoing, what is the point of passing them?

Since gouging is pretty well covered elsewhere, let's move on to predatory pricing. Stephen Crockett defines it like this:

Predatory pricing is the tactic of temporarily selling below cost products or services just to drive competitors out of business. After smaller competitors are driven out of business, the predators can then raise prices to price-gouging levels since consumers can no longer buy from the now bankrupt small competitors. Chain stores often use this tactic to destroy local businesses. Corporations like Wal-Mart have the economic ability to destroy small competitors in one small town after another because they have hundreds or thousands of other stores located outside the local market to subsidize the predatory behavior in the local market.

Predatory pricing may sound scary, but when examined a little more closely the entire concept turns out to be complete and utter nonsense. Simply put, any merchant who complains about predatory pricing is lazy, probably overpriced, and wants the government to protect them from competition. Any consumer who complains about it is a fool who ought to be taking advantage of the lower prices.

As a hypothetical example, let's say I own a store in Newark, Delaware that produces and sells self-sealing stem bolts. For several years I have been the only local supplier, but now EvilMart, a large retailer with 1000 stores nationwide, plans to build a store in the area that will compete with me and drive me out of business. My self-sealing stem bolts and EvilMart's are pretty much interchangeable, and the only reason to prefer one over the other is the price. It matters little whether my per-unit costs are higher, the same or lower than EvilMart's, but for the sake of argument let's say mine are lower (since this is an article about predatory pricing, they have to be. Otherwise EvilMart could still sell at a profit, and I would forced to either find ways of cutting costs, go out of business, or whine about predatory pricing and try under false pretenses to get my local government to prohibit them from opening a store here.) Also assume that shipping costs for self-sealing stem bolts are relatively low.

People like Stephen Crockett will claim that because EvilMart is much bigger and more powerful, they can easily force me out. This is simply not true. Remember that to hurt my business they must lower the price to a level where I lose money if I compete. But because their costs are higher than mine they not only lose money faster than I do per unit sold, they must also meet the entire local demand, otherwise the remaining customers will be forced to buy from me at my prices and I will profit while they lose money. The law of supply and demand tells us that at this lower price the demand will be greater, forcing them to increase sales and lose even more money.

Since I am not actually selling many stem bolts for as long as they are willing to lose money on them, I have even more ways to fight back. I can reduce my overhead by slowing or stopping production, laying off employees, cutting the staff at my retail outlets to a skeleton crew, and reducing my hours of operation. I can take advantage of these savings to lower my prices and force EvilMart's down so they must sell even more stem bolts at greater losses.

Stephen Crockett claims that EvilMart can charge high prices at their many stores outside my local market area to offset their losses here. This is false. Even if they have no local competition at some or all of their other stores, I can sell my product online anywhere UPS or FedEx ships and thereby limit their prices nationwide to no more than mine. Remember that unless they build production facilities everywhere they open a store, their prices will include shipping costs too. If I choose to, I can also take advantage of the opportunity to expand my operation by opening a branch in any region of the country where their stores sell a lot of stem bolts. Therefore they must charge approximately the same predatory prices at all 1000 of their stores and they will lose money more than 1000 times as fast as I do. I can continue this strategy for as long as they are willing to lose money. Even if I do not have the resources it will be trivial to find a bank or VC firm (not owned by EvilMart) that will loan money to a company like mine with a proven track record and a business plan that allows me to compete successfully with a corporation several thousand times my size.

Perhaps EvilMart can offset their stem bolt losses and continue trying to drive me out by overcharging for all of their other products that I don't sell. No, wait. That won't work either. Because they are located in the real world and not in some desert island or post-disaster scenario, each of their stores has tens, hundreds, maybe even thousands of competitors for every product they sell. This forces them to price any product they intend to sell at or below fair market value. Even if they do succeed in attaining a short-term monopoly on some commodity somewhere, it can only last until they raise prices to the point where competition is possible again.

Predatory pricing is a myth. It can only succeed in the short term in places where the competition is overpriced or slow to adapt. Historically it has almost always been the small startups that used the threat of price wars to force the monopoly or near-monopoly to either buy them out or give up market share.

The only ways corporations like Wal-Mart can only destroy small competitors permanently are by being more efficient than the competitors and keeping prices low which is good for the community (no matter what former their competitors may say), or by taking over or corrupting the local government and using its zoning and other regulatory powers to prevent new entries into the market even if they they raise prices.