Understanding Predatory Pricing Policy

A predatory pricing policy is a strategy where a firm sets prices very low on one or more of its products.

Objective of Predatory Pricing

The primary goal of predatory pricing is not immediate profit maximization. Instead, it is an aggressive tactic specifically designed to harm competitors.

Analyzing the Options

• Drive competitors out of business: This aligns directly with the definition. By setting prices below cost or market levels, a dominant firm can make it unsustainable for smaller competitors to operate, forcing them to exit the market.
• Maximise profits: While the ultimate aim might be future profit maximization after competitors are eliminated, the immediate action of predatory pricing involves sacrificing short-term profits or incurring losses.
• Encourage entrants into the market: Low prices and intense competition deter new firms from entering the market, rather than encouraging them.
• Attain least cost output: This refers to producing at the lowest possible average cost, often achieved at higher output levels. Predatory pricing doesn't directly aim for this operational efficiency; the focus is competitive elimination.

Therefore, the core purpose of a predatory pricing policy is to eliminate competition.