Predatory pricing is a pricing strategy where a company deliberately sets its prices below cost (sometimes dramatically below cost) with the explicit goal of driving competitors out of the market. Once the competition is gone or sufficiently weakened, the predatory pricer raises prices to recoup its losses and enjoy monopoly-level profits.
It is, in most jurisdictions, illegal. And yet it keeps happening.
I think predatory pricing is one of the most fascinating concepts in marketing because it sits right at the intersection of strategy, economics, law, and ethics. It's the kind of move that looks generous to consumers in the short term (who doesn't love cheap stuff?) but can devastate markets in the long run. It's also the kind of strategy that's surprisingly hard to prove in court, which is why companies keep trying it.
The Federal Trade Commission defines predatory pricing as pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run. The key legal standard comes from the 1993 Supreme Court case Brooke Group Ltd. v. Brown & Williamson Tobacco, which established two requirements for proving predatory pricing: the prices must be below an appropriate measure of the rival's costs, and the competitor must have a dangerous probability of recouping its investment in below-cost prices.
Predatory pricing always follows the same basic script, and understanding the pattern is crucial for anyone involved in competitive strategy.
Phase 1: The Attack. The predator slashes prices below its own cost of production. This is where the bleeding happens. The company is losing money on every unit sold, sometimes losing staggering amounts. The goal isn't profit. The goal is pain, making it financially unbearable for smaller competitors to keep operating. Competitors who can't match the artificially low prices lose customers, burn through cash reserves, and eventually either exit the market or sell at a discount to the predator.
Phase 2: The Harvest. Once competitors are eliminated or neutralized, the predator raises prices, often well above the pre-predation levels. With reduced competition, customers have fewer alternatives, and the predator can now charge monopoly or near-monopoly prices. The profits from Phase 2 are supposed to compensate for the losses in Phase 1.
The elegance (if you can call it that) of the strategy is that it uses the market mechanism itself as a weapon. You're not breaking into a competitor's office or stealing their trade secrets. You're just... selling things really cheaply. The brutality is financial, not physical, but the effect on competition can be just as destructive.
This is the case that most business school professors teach first. In 1993, an Arkansas judge ruled that Walmart had engaged in predatory pricing by selling health and beauty products below cost in certain locations. The strategy was targeted at local independent pharmacies and drugstores that simply couldn't absorb the losses that a company of Walmart's size could sustain. Walmart's defense was essentially: "We're just giving customers low prices." The court disagreed.
This one is wild. When Quidsi (the parent company of Diapers.com) refused Amazon's acquisition offer, Amazon's internal documents showed the company was willing to bleed over $200 million in losses on diapers in a single month. Amazon launched "Amazon Mom" with absurd discounts: 30% cash-back on diapers, free Prime memberships, and pricing that no rational business could sustain. Quidsi eventually sold to Amazon at a fraction of its potential value. Amazon then quietly raised diaper prices and phased out the aggressive promotions.
The U.S. Department of Justice sued American Airlines alleging that whenever small, low-cost carriers entered routes that American dominated, the airline would flood those routes with additional flights at dramatically reduced fares. Once the small carrier retreated, American would reduce capacity and raise fares back to previous levels. The case was ultimately dismissed in 2001, largely because of how difficult the legal standard makes it to prove "dangerous probability of recoupment."
In December 2024, the FTC hosted a public workshop titled "Competition Snuffed Out: How Predatory Pricing Harms Competition, Consumers, and Innovation." The workshop highlighted how digital markets have created new forms of predatory pricing that don't fit neatly into old legal frameworks. Platform businesses can sustain below-cost pricing for years, funded by venture capital, in ways that traditional manufacturers never could.