Predatory Pricing

It’s pricing below cost, hoping to drive your competition out of business. Like...you’re the predator. You’re willing to get sliced and kicked and punched a bit, knowing full well that the sweet, sweet juice of penguin du jour will be all the sweeter when it's being guzzled. Why or how does this work?

Well, think about the greatest retailer in the world, pre-Amazon. It was this soon to be little company called Walmart, which is now dying in largely the same way it killed the small mom & pop store. For 15 years, Amazon had no profits. Literally none. It sold product at a loss and made up for the losses by selling customer data, selling ad space, selling other Information Technology services on its web network, and so on.

Technically, Amazon used predatory pricing, kinda sorta, to take most of the retail dollar in the country. Why was Amazon not called out for the felony this represents? Because it was beating up on behemoths. Including WalMart. So like, how would the Dinosaur government come down on this little Sauropod for beating up on this huge T-Rex?

It didn’t make sense. Until the sauropod became big enough to just stomp on the T-Rex. But spin the clock back to the 1930s American landscape, which was dotted with tens of thousands of small stores like this one. The country store. They had maybe a thousand different items crammed into the small building. The owner bought them from a sub-distributor 50 miles away, and had things delivered by post or by rail every week, and bought like 8 sets of gloves at a time.

Then along came WalMart with its megastore system - where one store covered acres placed just in-between 8 small towns, enough to warrant visitors driving in their crappy cars in the 40s and 50s to spend all day shopping the 400,000 SKUs, or stock keeping units, that a typical Walmart had. And because WalMart ordered gloves in bundles of 10,000 units, the pricing it could command was half or less of what the small mom ‘n pop store owner could buy them at.

And, in fact, WalMart often retailed items for a price less than what the mom ‘n pop store could afford. So the mom ‘n pop stores were all driven out of business, ironically, in the same way that Barnes and Noble and Borders and the others drove out of business the small bookstores before Amazon destroyed them…

Was it predatory? Like...did WalMart actively seek to bankrupt the mom ‘n pop stores so they could own a kind of monopoly, which would then, in theory, be able to raise prices with impunity? Maybe.

It was accused of predatory pricing, anyway, as family business after family business closed. And the public read stories tearfully written by journalists who were employees of large media companies about how terrible it was, this family and that family who’d run their store for 150 years had to close.

Did the public stop shopping at WalMart and return to the much higher priced, much lower value mom ‘n pop stores in order to really show those evil predator people at WalMart a thing or two about how American culture works in supporting the little guy, the underdog, the downtrodden…?

Um…No.

America is a capitalist country. We vote with our dollars. So when predatory pricing activity happens, it's kind of a double-edged sword. For a short period of time, consumers benefit by having amazing value given to them, prices at such low levels, sponsored by the company dumping losses to buy market share. But then, when all the competitors are driven out of business, the seller has a monopoly. Essentially. The consumer then pays handsomely for everything with little or no alternative buying options.

And this type of activity happens all the time in tech. A given country wants to own, say, mobile semiconductor manufacturing ability for the next decade. Their factory cost 5 billion dollars. Their country is backing them with insanely cheap debt, as that factory puts to work hundreds of thousands of workers. So that country then dumps chips at 11 cents a unit when it costs them 14 cents, and the big existing makers can’t produce them for less than 18 cents.

And after a while, those pennies add up. And there’s just one chip maker who can then sell their wares for 30 cents, and more than make up for those predatory pricing losses. That’s the theory, anyway, for how it should work if you’re a predator. And if that makes you happy, well…then you should clap your hands.

Or… try to, anyway, even if you're a T-Rex...