1.Suppose you are considering “predatory pricing” as a business strategy – you’ll cut your prices
below your costs for a while to drive your rival(s) into bankruptcy, and then you’ll raise prices
high enough to recover the losses you suffered once there are no more pesky competitors
around. What conditions have to be satisfied for this to work? What possible problems (apart
from antitrust lawsuits) might make this plan fail?
A firm must meet the following conditions to ensure predatory prices are achieved (1) sacrifice
short-term profits and (2) it must have an ability to raise prices. The predatory pricing economic
theory states a firm must choose to sacrifice short-term profits. However, the company doesn’t
have to make a loss. Mostly, during the predatory pricing, the prices are lower than the costs.
The firm must fulfill this condition for a strategy to work. As well, a firm must able to increase
prices after repelling competitors so that it can compensate for the sacrifice made to incur shortterm losses (Kaplow, 2018). This important condition, as it is difficult to sustain a monopoly
price level after raising the prices. Also, the entry of another company in the market can force the
predator not to recover short-term losses. Therefore, a firm must satisfy the conditions outlined
in order for ...
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