Predatory pricing occurs when a dominant firm temporarily charges particularly low prices in an attempt to eliminate existing competitors. The predator will incur temporary losses during its low pricing policy with the intention of raising prices in the future to recoup losses and gain further profits. Such behaviour may offer consumers advantages in the short run but will be disadvantageous in the end, as it will ultimately reduce competition. It is prohibited under Section 20 of the Act.
Dominant firms may also engage in predation in order to discipline competitors who have undertaken to challenge the market power of the dominant firm. The intent of disciplinary actions is to convince the target of the actions to cease a particular practice rather than to eliminate or exclude the competitor from the market. The net result on competition can be the same as elimination of a rival, if the disciplining results in the elimination of the competitive threat of the target.
Predatory pricing necessarily involves the ability to raise prices once rivals have been disciplined or have exited the market. Consequently, a key consideration in determining that low prices are in fact predatory and may lead to a substantial lessening of competition is whether the market is characterized by high barriers to entry. Without such barriers, any post-predation price increase by the dominant firm would simply attract entry so that the dominant firm would not be able to raise prices and recoup the costs of predation.
It is difficult to distinguish predatory pricing from competitive pricing since both, at least initially, involve lower prices. Predatory pricing is often described as selling at a price below some measure of cost. A price below marginal or average variable cost provides a sufficient condition for concluding that there is predatory behaviour. It is not, however, a necessary condition. A firm can engage in predation without dropping prices below average variable or marginal cost, particularly if it already has in place excess capacity. Hence, where price is found to be above marginal and variable cost but below average total cost and the alleged predator is dominant, predation may be a feasible strategy.