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Cost Accounting: What is Predatory Pricing? 1 Views


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What is Predatory Pricing? Predatory pricing happens when companies set prices really low to drive their competitors out and attempt to create a monopoly. It’s illegal for a variety of reasons, including the measures they must take in order to be able to get their prices so low, like using illegal production strategies (working too many hours without adequate compensation, things like that).

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Transcript

00:00

And finance Allah Shmoop What is predatory pricing Let's pricing

00:09

below cost Hoping to drive your competition out of business

00:13

like you're the Predator you're willing to get sliced and

00:17

kicked and punched a bit knowing full well that the

00:20

sweet sweet juice of penguin du jour will be all

00:23

the sweeter when it's being you know guzzled well Why

00:26

or at least how does this work Well think about

00:29

the greatest retailer in the world the pre Amazon It

00:32

was this soon to be little company called Walmart which

00:35

is now dying in largely the same way it killed

00:38

the small mom and pop store Well for fifteen years

00:41

Amazon had no profits literally none It's sold product at

00:45

a loss and made up for the losses by selling

00:47

customer data selling ad space selling other information technology services

00:52

on its Web network and so on It did not

00:55

make money from selling books Well technically Amazon used predatory

00:59

pricing kind of sort of to take most of the

01:01

retail dollar in the country Well why was Amazon not

01:05

called out for the quote Felony unquote This represents well

01:08

because it was beating up on Big Seamus including Wal

01:11

Mart So like how would the dinosaur government come down

01:15

on this little Sora pod for beating up on this

01:18

huge T Rex Yeah it didn't make sense Well until

01:21

the store a pod became big enough to just stop

01:23

on the T Rex or uh you know do this

01:27

but spin the clock back to the nineteen thirties Yeah

01:29

that's the American landscape actin which was dotted with tens

01:33

of thousands of small stores like this one the country

01:37

store They had maybe a thousand different items crammed into

01:40

the small building The owner bought them from a sub

01:43

distributor fifty miles away and had things delivered by post

01:47

or by rail every week and bought like eight sets

01:49

of gloves at a time Then along came Wal Mart

01:52

with its megastore system where one store covered acres place

01:56

just in between eight small towns It was enough volume

02:00

available to buy tow warrant visitors driving in there You

02:04

know crappy cars in the forties and fifties to spend

02:07

all day shopping the four hundred thousand stock keeping units

02:11

or skews our escape use that a typical Wal Mart

02:14

store had And because WalMart ordered gloves in bundles of

02:18

ten thousand units from the manufacturer will the pricing it

02:22

could command was half or less of what the small

02:25

mom and pop store owner could buy them for And

02:28

in fact Walmart often retailed items for a price less

02:32

than what the mom and pop store could even buy

02:35

them for Like there'd be no profit for Mom and

02:38

or Pop So the mom and pop stores were all

02:40

driven out of business And ironically it's the same way

02:43

that Barnes and Noble and Borders and the others drove

02:45

out small book stores You know Mom and pop bookstores

02:49

before Amazon then destroyed Barnes and Noble and Borders and

02:52

the other was all this predatory like Did WalMart actively

02:55

seek to bankrupt the mom and pop stores so they

02:59

could well own a kind of monopoly which would then

03:02

in theory be able to raise prices forever with impunity

03:05

There may be Prove it Good luck in court of

03:08

law You gotta prove that it was accused of predatory

03:11

pricing anyway as family business after family business clothes and

03:15

a lot of arm waving in Nina Nina Ring and

03:18

the public read stories tearfully written by journalists who were

03:21

employees of large media companies about how terrible it wass

03:25

You know this family in that family who'd run their

03:28

store for one hundred fifty years now had to close

03:30

because Walmart ate their lunch Did the public stop shopping

03:34

at Wal Mart and then return to the much higher

03:36

priced much lower value mom and pop store products in

03:40

order to really show those evil predator people at Wal

03:43

Mart a thing or two about how American culture works

03:46

in supporting the little guy The underdog the downtrodden No

03:50

America is a capitalist country We vote with our dollars

03:53

So when predatory pricing activity happens it's kind of a

03:56

double edged sword For a short period of time Consumers

03:59

benefit by having amazing value given to them prices at

04:02

such low levels sponsored by the company dumping them and

04:06

having losses to essentially by market share for themselves in

04:10

the future But then what All the competitors were driven

04:13

out of business Well then in theory the seller has

04:15

a monopoly like WalMart kind of did at least locally

04:19

for a long time The consumer then pays handsomely for

04:22

everything with little or no alternate buying options But in

04:26

practice that almost never happens because competitors aire lurking behind

04:30

rocks pretty much everywhere And this type of activity happens

04:33

all the time in technology A given country wants to

04:36

own say mobile semiconductor manufacturing ability For the next decade

04:40

their factory costs five billion dollars there Country makes the

04:44

country's banking system is backing them with insanely cheap debt

04:49

as that factory puts toe work hundreds of thousands of

04:52

that country's local workers So that country then sells chips

04:55

for eleven cents each or at least per unit Or

04:58

however you want to do the math when it cost

05:00

that country fourteen cents to make him And the big

05:03

existing makers can't produce them for less than eighteen cents

05:07

a unit Well after a while those pennies add up

05:10

and there's just one ship maker who can then sell

05:13

their wares for thirty cents a unit and more than

05:16

make up for those predatory pricing Three sent a unit

05:19

losses they suffered in the beginning That's the theory anyway

05:22

for how predatory pricing works for how it should work

05:26

At least if you're a predator and if that makes

05:28

you happy well then you should clap your hands or 00:05:31.838 --> [endTime] try to anyway

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