By the term pricing decision, we mean the choices of business entities taken into consideration by them while setting the prices for their products and services. As price of a product plays an important role in growth of the business entities. Price of a product must be set after considering various factors like;
Importance of Pricing decision
For the Long Term survival and Growth of an business entity, the entity should plan proper and acceptable pricing policy. For example; if a company launches a new product in the market, then the new product should be categorized into Two types for the purpose of pricing -
Revolutionary Product: This type of product is said to be revolutionary when it is newly introduced in the market and has the potential to create its own value. When a new product is introduced, it has the capability of becoming market leader and capture the major market share.
Evolutionary Product: A Product which has been introduced with some upgradations like with few additional characteristics in it, is known as evolutionary product. It may priced by taking cost benefits, competitor and demand for the product.
Now coming on to main discussion
Understanding the role of Predatory pricing done by business entities,
What is predatory pricing?
In Predatory pricing, the pricing of goods and services are quoted at such a low level that other firms cannot compete and are forced to leave the market.
This type of pricing is mainly done to drive out the competitors from the market and gain the major market share. After driving out the competitors from the market, the dominating firm create its own monopoly and, thereafter controls the entire market and price of products and services. Predatory pricing is also known as undercutting. The main objective of setting out this type of pricing is to achieve new customers and creating barriers for new entrants.
Predatory pricing is anti-competitive in nature and therefore this type of practice is illegal and is prohibited under many competition laws
Predatory pricers are also termed as loss leaders.
There are two stages in predatory pricing;
1) Predation stage: In this stage, goods and services are offered at below its cost in order to price its competitors out of the market
2) Recoupment stage: This stage only arises in cases where the dominant firm succeeds in squeezing competitors out of the market- within this stage the dominant firm charges monopoly prices in the effort to cover their losses.
At last, this type of practice should be avoided so as to create healthy competition among the players present in the market.