Price wars among competitors are often a positive sign of
healthy competition. As businesses undercut each other on price,
consumers benefit from more affordable goods and services.
Although it rarely happens, excessively low prices may harm
competition when a dominant business deploys a below-cost pricing
strategy to damage a competitor, drive an existing competitor out
of the market, and deter potential competitors from entering.
Smaller competitors may not have deep enough pockets to compete
with a powerful business, and, when equally efficient, but smaller
competitors are driven out of the market, the predating business
can strengthen its market power to raise prices and exploit
consumers. Ultimately, consumers may be left with fewer choices,
higher prices or reduced quality of goods and services.
When does low pricing cross the line to become
Competition law recognises that aggressive discounting and price
cutting are essential, pro-competitive behaviour and generally
indicate the existence of a healthy market.
Businesses may be able to afford to price lower than the
competition because they are more efficient or face lower costs of
Thus it is not sufficient for a competitor to complain that
lower prices in the market are making life difficult. A number of
criteria must be met before a pricing strategy can be considered
A business with substantial market
power prices a product or service below cost1.
The purpose of selling below-cost is
to damage, or eliminate the competition; and
Below-cost pricing is sustained long
enough that as a result:
Existing competitors have exited the
New competitors are unable to enter
the market; or
Competitors are unable to compete
In some markets predatory pricing may not be a viable
strategy at all. The following market characteristics may prevent a
business from recouping its losses after implementing a predatory
There are many competitors, or other
competitors with market power – a predatory pricing strategy
is unlikely to effectively damage the competition.
Entry barriers are low –
competitors can easily re-enter, or new competitors may enter the
market after prices return to normal levels.
In the absence of a likelihood of recoupment of losses, a
predatory pricing strategy would make little commercial sense.
Are there justifications for below-cost
Genuine commercial justifications for below-cost pricing may
rebut an allegation of predation or justify the effects of such
pricing on the competition.
The following are legitimate reasons for a limited duration of
The pricing strategy is connected to
the introduction of a new product or service.
Below-cost pricing is required to
penetrate a new market.
The pricing strategy is necessary to
meet the competition.
The goods sold below-cost are
perishable or damaged inventory.
Next week we will take a look at anti-competitive tying and
1 In this regard, the Competition Commission has
indicated that it will consider pricing below average variable cost
unlikely to be economically rational, but pricing below average
total cost may be legitimate commercial behavior.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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Omar Al Heloo discusses the developments in UAE competition law.
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