But Predatory Pricing Just Doesn’t Work

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Sure we can allege that anyone with market power will drive down prices to kill the competition then raise them to exploit monopoly. The problem with this being that the strategy doesn’t work. As we’re about to prove yet again:

The background now is that oil demand has fallen as a result of the coronavirus. OPEC wants to reduce output to keep prices up, but Russia doesn’t want to play that game. Russia would like to crush the fracking industry in the United States. Low prices will do that — and yes, the Permian Basin is going to see some financial blood from current prices. Saudi Arabia then punishes Russia for stepping out of the cartel by lowering prices. There will be much blood in the Permian. This might even kill some of the fracking companies.

But here’s the problem — or the two problems. There’s still that potential competition there. The technology of fracking will still exist, America will still be an industrial powerhouse, and the rocks aren’t going anywhere. So Saudi and Russia never will be able to exploit high prices as a result — fracking will just reappear when prices rise. And even if it doesn’t, they’ll not be able to recoup the cost of what they’re doing.

As Craig Pirrong, an expert on these commodity markets, points out, the current price cuts are costing those two countries some $500 million a day. Even in politics and government, the equivalent of losing one Michael Bloomberg campaign each and every 24 hours is real money. Do this for three months, and that’s $50 billion or so. For a year, it’s $200 billion — that is vastly beyond what can be recouped by future higher prices.

Predatory pricing just doesn’t work. It’s entirely possible to hurt, harm, or even kill the current competition, as certain Texans are about to find out. But it’s not possible to benefit from having done so — the costs of the tactic are too high for it to be profitable.

As it doesn’t work it’s not something we’ve got to strain to root out, is it? Thus dies an awful lot of complaints about “unfair” competition.

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Spike
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Spike

“Predatory” offers to buy or sell? Simply don’t accept the offer. No market at a profitable price? Businessmen often lose sleep wondering if tomorrow is the day that no one walks into the shop. No news, no crisis!

Phoenix44
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Phoenix44

I’m not following the maths. If it takes one year at say $30 below a value to drive out competition, then you need two years at $15 above that number to make the money back. The problem might be that the competition will come back too quickly in the case of a market such as oil, but it can’t simply be a numbers issue.

Barks
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Barks

Of all the developed markets in the world, that of Texas wildcatter, independent driller, or shoe-string developer has to be the most resilient. Sure there will be a large shake-out of individuals and companies (most woefully underfunded) on Friday, but there will be a whole lot of them anxious to give it another go on Monday. Fracking wasn’t invented and perfected in the District of Columbia, you know.

Michael van der Riet
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Michael van der Riet

If you have the deeper pocket and if you are assured that no other competitor will fill the gap before you’ve recovered your ill-gotten gains then yes, predatory pricing works just fine.

Spike
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Spike

But in that case, what saved you is not the predatory pricing but the assurance, usually provided by legislation.