A firm sets extremely low prices for its products so that most customers will stop shopping elsewhere. This will cause other companies to go out of business and leave the firm with no more competition. The firm has engaged in ______.

A firm sets extremely low prices for its products so that most customers will stop shopping elsewhere. This will cause other companies to go out of business and leave the firm with no more competition. The firm has engaged in ______.

• A. Loss-leader pricing
• B. Predatory pricing
• C. Price discrimination
• D. Price gouging

Answer: (B)

Predatory pricing is when a firm sets prices so low that rivals can’t compete, with the aim of driving them out of the market and then gaining the ability to keep prices high once competition is reduced. In this scenario, the extreme low pricing is designed to eliminate competing firms, leaving the firm with little to no competition and the power to raise prices later. That long-term objective of removing rivals and creating monopoly power is what makes this approach predatory pricing. Loss-leader pricing uses very low prices to attract customers with the goal of increasing overall sales, not to wipe out competition. Price discrimination means charging different prices to different customers based on willingness to pay, which isn’t about eliminating rivals. Price gouging involves sharply increasing prices during shortages, again not about driving competitors out of business.

Predatory pricing is when a firm sets prices so low that rivals can’t compete, with the aim of driving them out of the market and then gaining the ability to keep prices high once competition is reduced. In this scenario, the extreme low pricing is designed to eliminate competing firms, leaving the firm with little to no competition and the power to raise prices later. That long-term objective of removing rivals and creating monopoly power is what makes this approach predatory pricing.

Loss-leader pricing uses very low prices to attract customers with the goal of increasing overall sales, not to wipe out competition. Price discrimination means charging different prices to different customers based on willingness to pay, which isn’t about eliminating rivals. Price gouging involves sharply increasing prices during shortages, again not about driving competitors out of business.