Predatory Pricing and International Trade

A classic piece of industrial organization literature is John McGee’s 1958 article in the Journal of Law and Economics Predatory Price Cutting: The Standard Oil (NJ) Case.

In the article, McGee looks at price-cutting allegations leveled against Standard Oil in the early 1900’s. He examines the evidence of the case but also lays out a rather brilliant critique of price cutting as an effort to secure/gain monopoly power in a market. In short, he logically shows that price cutting is, by far, the least effective means of accomplishing this. It tends to be far more devastating to the price-cutting firm and, if the market is competitive, such price cutting could go on for years and years. It is far cheaper to simply buy up competition.

Dr McGee’s analysis should give us pause when considering “dumping” allegations in regard to international trade.  Dumping is a form of predatory pricing: manufacturers exporting goods to foreign markets and selling well below cost in order to grab market share.  As Dr McGee logically lays out in his article, predatory pricing tends to be extremely costly to the predator.  This could be why governments need to subsidize the firms in order to perpetuate the scheme.  However, as GMU economist Don Boudreaux points out in this blog post, subsidies harm the economy as a whole, while enriching the few who receive them.  Assuming China is subsidizing exports for the purpose of monopolizing highly-competitive markets, China is opting for short-term gains for firms by socializing the losses from the predatory pricing behavior on the off-chance they can monopolize a market.  Dr McGee’s analysis in the article indicates this is an extra-risky strategy (mergers and partnerships with US firms would be a far more effective way of accomplishing this goal).

2 thoughts on “Predatory Pricing and International Trade

  1. “The phrase ‘unfettered trade’ is used for justification for government intervention in trade, but the argument is a red herring; a false representation of market forces.”

    Bigger government advocates always have to make stuff up because facts and reason seldom support their view.

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