Price strategy to eliminate competitors
This strategy involves the fixing of prices at a low level to destroy the competition. Prices are usually below the level of the costs of production.
The intent of this pricing policy is harming the competition even when it brings the financial loss to the company. Only after the elimination of competition, prices can be raised to a level ensuring the profit.
One of the American oil companies eliminated competitors by reducing on local markets prices to half of the cost. After that competitors were bought by the company at nominal price. The company then fought back from losses on the market without competition, setting prices higher than normal and become a monopolist in the market.
Such pricing practices are also called "plundering pricing". To be able to use such pricing, the company must dominate the industry and have a strong financial position. It involves big risks for the financial situation.
In the 19th century, price plundering was widely used in many industries for example. oil, tobacco, sugar. However, they met with large resistance, because they were treated as a form of illegal discrimination, weakening competition and favouring the formation of a monopoly.
Currently, the company apply a mild form of price plundering, selective price reductions to certain ranges within the product line. For example, a company producing cameras can set unprofitable prices on cheaper models to boost sales of the entire product portfolio. Such companies are coming out with the assumption that losses arising as a result of the sale at a reduced price will be offset by sales of more expensive products.
- Hamilton, R., & Chernev, A. (2013). Low prices are just the beginning: Price image in retail management. Journal of Marketing, 77(6), 1-20.