Uncle Sam can’t seem to make up his mind about how to define predatory pricing. Charge too little for a good or a service and the federal government might term it predatory pricing. But charge too much for a good or a service and the federal government might term it predatory pricing. And here is a related question: How does the federal government know what the price range of a good or a service should be so that it can determine whether a firm is practicing predatory pricing? It is my contention that predatory pricing is a misunderstanding, a misconception, a myth.
The most common example of predatory pricing is when a large firm offers a product for sale at a low price, which might even be below its cost, in order to drive its smaller competitors out of business. Then, the idea is, the large firm can raise its prices to whatever level it wants and take advantage of consumers who now have no other choice but to buy from the large firm. According to the Federal Trade Commission (FTC):
Can prices ever be “too low?” The short answer is yes, but not very often. Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time. A firm’s independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market. Although the FTC examines claims of predatory pricing carefully, courts, including the Supreme Court, have been skeptical of such claims.
In more technical economic terms, as stated in the U.S. Department of Justice document titled “Predatory Pricing: Strategic Theory and Legal Policy”:
In most general terms predatory pricing is defined in economic terms as a price reduction that is profitable only because of the added market power the predator gains from eliminating, disciplining or otherwise inhibiting the competitive conduct of a rival or potential rival. Stated more precisely, a predatory price is a price that is profit maximizing only because of its exclusionary or other anticompetitive effects. The anticompetitive effects of predatory pricing are higher prices and reduced output (including reduced innovation), achieved through the exclusion of a rival or potential rival.
The problem with this whole scenario is that it has never actually happened, and is very unlikely to ever happen. Dominick T. Armentano, professor emeritus of economics at the University of Hartford, and author of Antitrust: The Case for Repeal (Mises Institute, 1999), in his survey of scores of antitrust cases, didn’t uncover a single successful example of predatory pricing. He concluded that “antitrust’s dirty little secret is that the laws have been employed consistently to hamper successful business organizations and protect their less efficient rivals.” Economist William L. Anderson, writing in the Quarterly Journal of Austrian Economics (2003), similarly concluded that “predatory pricing theory persists because well-placed individuals and organizations that benefit from accusing others of engaging in predatory pricing will use their resources to keep the theory alive.”
Predatory pricing cases in the federal courts were infrequent until after the enactment of the Robinson-Patman Act in 1936. This legislation — which amended the Clayton Antitrust Act of 1914 — was supposed to prevent “unfair” competition by outlawing price discrimination; that is, wholesalers charging retail customers different prices for the same product based on what the sellers think they can get the customers to pay. It was intended to prevent buyers of large volumes of goods from gaining an unfair advantage. Under the Robinson-Patman Act, only interstate commerce of tangible commodities of like grade and quality sold for “use, consumption, or resale” are subject to the Act’s provisions.
During this time, plaintiffs won most litigated cases. However, the publication of the Areeda-Turner rule in 1975, which proposed a single standard of judgment based on average variable cost instead of vague formulations like below cost, ruinous competition, and predatory intent, caused plaintiff success rates to plummet. The first major and most important predatory pricing decision in modern times was the Supreme Court case of Brooke Group Ltd. v. Brown & Williamson Tobacco (1993). First, a federal district court found for the defendant in Liggett Group, Inc. v. Brown & Williamson Tobacco Corp. (1990) because there was a “lack of injury to competition, lack of antitrust injury to Liggett, and lack of a causal link between the discriminatory rebates and Liggett’s alleged injury” (Liggett is the former corporate name of the petitioner). The U. S. Court of Appeals for the Fourth Circuit affirmed the verdict in 1992, as did the Supreme Court in 1993. Since this case, no predatory pricing plaintiff has prevailed in the federal court system.
The federal government (joined in most cases by the state governments) has a number of other things that it considers to be predatory pricing (even if the adjective is not always or consistently applied): pricing that is unjust, pricing that is out of line with the rest of the industry, pricing that is usurious, pricing that grossly exceeds some average or stated price, pricing that is exorbitant or unconscionable, pricing that harms the poor, pricing that is discriminatory, or pricing that is below cost.
For those Americans who live near the Atlantic or Gulf coasts, the past few months, and on into next month, are hurricane season. During this time of year, some people are more worried about price gouging than they are about hurricanes.
Price gouging is said to be the charging of a price for a good (or a service) that is higher than the usual, fair, or market price during times of national disaster or crisis. In economic terms, price gouging is an increase in the price of a good due to a temporary increase in demand rather than an increase in the cost of supplying the good. Price gouging is said to be predatory because it takes advantage of people who need convenient access to necessities during times of crisis. How high prices on a particular good have to go before they are considered to be predatory is completely arbitrary and subjective and depends on which state one is in.
Higher prices help prevent hoarding, create incentives for suppliers, encourage conservation, bring much-needed supplies into disaster zones, send a signal to entrepreneurs that profit opportunities are available, tell suppliers what their customers want the most, allocate goods more efficiently than low prices and shortages would, and set off an economic chain reaction that ultimately remedies the shortages that led to the price gouging in the first place.
Price gouging is a crime in search of a victim. In any exchange, the seller is happy because he sells a good, and the buyer is happy because he buys a good. Where is the victim? That the buyer has to pay more than he would normally pay is irrelevant. If he doesn’t like the price, then he doesn’t make the purchase. The fact that he does means that he values the good more than the money. Price gouging is simply charging market prices for goods that are in high demand and short supply. Natural disasters, crises, and emergencies don’t negate economic laws.
Predatory pricing is not limited to the prices of goods sold or services performed. The Federal Deposit Insurance Corporation (FDIC) broadly defines predatory lending as “imposing unfair and abusive loan terms on borrowers.” Every state has laws that limit the rate of interest that can be charged on loans depending on the type of lender or borrower, the loan amount, and the nature of the loan contract. On the federal level, the Military Lending Act, passed in 2006 and amended in 2017, protects members of the armed forces from predatory lending practices by capping the interest rate for loans given to service members and their covered dependents at an annual percentage rate (APR) of 36 percent.
Payday loans are the predatory lending bogeymen. This is when a borrower writes a post-dated check to a lender in exchange for a cash advance of a lesser amount to hold him over until payday. When that day comes, the borrower either pays the lender the amount of the check or the lender cashes the check. The difference between the amount borrowed and the amount paid is the lender’s fee. The APR for these small-dollar, short-term loans can be well over 100 percent. According to the Journal of Economic Perspectives, “there are more payday loan and check cashing stores nationwide than there are McDonald’s, Burger King, Sears, J.C. Penney, and Target stores combined.”
Clearly, there is a market for access to high-cost, short-term credit by those who have been offered less credit than the amount they applied for or turned down for other forms of credit altogether. Government attempts to prevent excessive, unreasonable, or usurious levels of interest shut riskier borrowers out of this market entirely and increase the incidence of fraud, theft, and resorting to illegal loan sharking. Moneylending should be viewed as a business like any other business.
The most ridiculous case of predatory pricing is dumping. This is when a company sells goods in another country at prices below what it charges in its domestic market, often at a loss, to drive its domestic rivals and other foreign exporters out of business so it can achieve a monopoly and then raise its prices to whatever level it wants.
The World Trade Organization (WTO) has rules against predatory dumping, that is, dumping that harms producers in the targeted market. And so does the United States. According to the U.S. International Trade Commission (USITC):
U.S. industries may petition the government for relief from imports that are sold in the United States at less than fair value (“dumped”) or which benefit from subsidies provided through foreign government programs. Under the law, the U.S. Department of Commerce determines whether the dumping or subsidizing exists and, if so, the margin of dumping or amount of the subsidy; the USITC determines whether there is material injury or threat of material injury to the domestic industry by reason of the dumped or subsidized imports.
Just this year, as reported by the Specialty Equipment Market Association (SEMA), the USITC “issued a final decision that U.S. industry is being harmed from imports of passenger and light-truck tires at less than fair value (“dumping”) from South Korea, Taiwan and Thailand, and that tires are being subsidized by the government of Vietnam.” The U.S. Department of Commerce then issued final calculations for dumping duties to be assessed for tires from South Korea (14.72 to 27.05 percent), Taiwan (20.04 to 101.84 percent), and Thailand (14.62 to 21.09 percent), as well as countervailing duties for tires from Vietnam (from 6.23 to 7.89 percent). The duties are collected by U.S. Customs and Border Protection.
Anti-dumping laws have nothing to do with “fair” trade or a “level playing field.” Their primary function is simply to provide an elaborate excuse for protectionism to benefit U.S. industries that don’t want any foreign competition. They have been called by economists the most arbitrary and disruptive U.S. trade barrier. American consumers should be happy to purchase all of the products that are “dumped” on its shores by foreign companies. And it is foreigners who are harmed when their governments subsidize their industries, not Americans.
The most recent outrage over predatory pricing concerns overdraft fees charged by banks. In an opinion piece (“Overdraft Fees Are Big Money for Small Banks”) that appeared online at Politico a few months ago, Aaron Klein, who is Senior Fellow in Economic Studies at the Brookings Institution, argues that “when it comes to predatory overdraft practices, big banks may not be the worst offenders.” He begins by pointing out that overdraft fees, which can be as high as $35 per “swipe of your debit card when you are out of money,” have “become big money for banks, generating more than $31 billion in revenues in 2020.” This has come at the expense of tens of millions of families: “One out of eleven Americans spends $350 or more a year in overdraft fees. Overdraft is one of many reasons why it is expensive to be poor in America.”
But just as all banks are not created equal, so all bank overdraft fee profits are not created equal. Klein found that “overdrafts are bigger business for some banks than others.” JPMorgan Chase collected the most in overdraft fees (“more than $2 billion in 2019, which works out to more than $35 in overdraft fees per account”), but this only amounted to 7 percent of total profit. For Citibank, overdraft fees only amounted to less than 1 percent of total profit. What Klein found surprising in his research is that “a small number of small banks make almost all their profit thanks to overdraft.” According to his calculations, “for multiple years running, at least six small banks depend on overdraft revenue for a majority of their profits.” And for three of those banks, “overdraft revenues have exceeded total profits for each of the past two years — meaning these banks lost money from banking, except for charging overdraft fees.” It is a handful of smaller banks that are “the true overdraft giants.”
Klein concludes: “It’s time for banks to stop assessing overdraft fees in a predatory manner, and it’s time for regulators to step up and make sure that happens. It’s no longer acceptable to permit some banks and credit unions to feed from the bottom with business models dependent on profiting from fees charged only to vulnerable Americans.”
But is this really the case of banks preying on “vulnerable Americans?” Klein acknowledges that according to the Consumer Financial Protection Bureau, “a small number of consumers account for the vast amount of overdrafts; 8 percent of bank customers account for almost 75 percent of all overdraft revenue.” Sounds like some Americans simply have chronic money management problems.
In his attempt to deflect blame from those who regularly have to pay overdraft fees, Klein makes two misstatements in one sentence: “It is hard for people to keep track of just how much is in their bank account, particularly since deposits including direct deposits can take days to post to the account.” Everyone with a smart phone and a banking app can check his account balance every minute of the day. That is the only way that most younger people ever check their account balance. They never even look at their monthly statements. Those Americans who can’t afford a smart phone probably don’t even have a bank account. (According to the FDIC, about 5.4 percent of households, or approximately 7.1 million homes, did not have a bank account in 2019.) Every direct deposit I have ever received posts to my account overnight and shows available in the morning. One thing that every worker knows, even if he knows very little else, is the day that his direct deposit hits his bank account.
Klein also doesn’t bother to explain the whole truth about overdraft fees and debit cards anywhere in his article. Most banks offer optional overdraft protection of some kind with their accounts. And when it comes to debit cards, as JPMorgan Chase says: “You tell us how you want to handle your everyday debit card transactions.” If you don’t have overdraft protection or enough funds in a linked Chase account, and you:
- Choose NO, the transaction will be declined and you won’t be charged a fee.
- Choose YES, we may pay the overdraft transaction at our discretion based on your account history, the deposits you make and the transaction amount.
Anyone can tell his bank to decline all debit card transactions when there are insufficient funds in his account. There is no right to access money that you don’t have and not have to pay for the privilege of doing so.
There are six main problems with predatory pricing laws.
First, predatory pricing laws violate property rights, freedom of contract, free enterprise, free markets, and a free society.
Second, government bureaucrats and economists have an economic calculation problem. At what level of price increase or decrease does it become predatory? For the government to try and calculate how much prices should be allowed to rise or fall is pure Soviet-style central planning.
Third, the ability of a business to raise or lower its prices on a particular good or on all the goods it sells is one of the essential things that distinguishes a free market from government central planning. The reason why a business raises or lowers its prices is absolutely irrelevant.
Fourth, once it is accepted that the government should establish price floors and ceilings for certain goods and services, then no logical or reasonable argument can be made against the government’s establishing price floors and ceilings for all goods and services.
Fifth, predatory pricing laws are predicated on the false notion of a just price. But a just price for an item does not exist independently of a transaction between buyer and seller. In the absence of fraud — but not necessarily the absence of ignorance or greed — not only is any price agreed upon between a willing buyer and a willing seller the just price, that alone is what makes it the just price.
Sixth, every commercial transaction must involve a willing seller and a willing buyer or the transaction will never take place. Free and unfettered interaction between buyers and sellers is always to be preferred to government intervention of any kind. It is simply none of the government’s business what price any individual or business charges for any good or service.
This article was originally published in the October 2021 issue of Future of Freedom Archive.