What Is Predatory Pricing?
Predatory pricing is a deliberate competitive strategy in which a dominant firm sets prices below its own costs to drive rivals out of a market, then raises prices to recoup losses once competition is eliminated. It is illegal under antitrust law in most jurisdictions but notoriously difficult to prove in court.
Worked example: A market-leading industrial supplier with an average variable cost of $80 per unit prices at $55 per unit for 18 months — the Predation Phase. Three smaller competitors, unable to absorb sustained losses, exit the market. The dominant firm then raises its price to $130 per unit — the Recoupment Phase — recovering prior losses and earning supranormal profit.
How Predatory Pricing Works
Predatory pricing operates in two sequential stages. In the predation phase, the dominant firm prices below a relevant cost threshold, absorbing losses that financially weaker rivals cannot sustain. The key advantage is not the low price itself but the firm's "deep pocket" — its ability to outlast competitors during extended below-cost periods.
In the recoupment phase, after rivals exit, the firm raises prices above competitive levels to recover accumulated losses and generate above-market returns. Recoupment is not automatic; its feasibility depends on barriers to re-entry, the firm's market share, and whether new competitors can enter before prices are fully elevated. Courts treat recoupment probability as a separate and critical element of any predatory pricing claim.
The Legal Standard: How Predatory Pricing Is Proven
In the United States, courts apply the two-prong Brooke Group test: the plaintiff must show (1) that the defendant priced below an appropriate cost measure, and (2) that there was a dangerous probability of recoupment. Both prongs must be satisfied; failing either defeats the claim.
Cost benchmark selection is the most technically demanding element. Marginal cost, average variable cost (AVC), average total cost (ATC), and average avoidable cost (AAC) each produce different outcomes. U.S. courts most commonly apply AVC or AAC; prices above AVC are rarely found predatory. Recoupment probability is the point at which most predatory pricing cases fail — plaintiffs must show that market structure makes sustained supra-competitive pricing plausible after rivals exit.
EU competition law applies the AKZO standard, which operates differently. Prices below AVC carry a rebuttable presumption of predation without requiring separate proof of intent. Prices between AVC and ATC require the plaintiff to demonstrate eliminationist intent through direct evidence. The EU framework is generally considered easier to satisfy than the U.S. Brooke Group test because intent can substitute for cost-threshold evidence in the intermediate band.
Predatory Pricing vs. Loss Leader Pricing
If a below-cost price is scoped to a specific SKU for a seasonal promotion with no rival-exit objective, it is almost certainly not predatory. The distinguishing factor is strategic intent paired with a credible recoupment path.
What This Means for Enterprise Pricing Teams
Three considerations are directly relevant to pricing and commercial strategy leaders.
Compliance exposure. Firms with dominant market share face antitrust scrutiny on aggressive below-cost discounts even when predatory intent is absent. Pricing teams should document the cost-basis rationale for deep discounts, particularly when prices approach or dip below AVC.
Competitor signaling. Recognizing a rival's potential predatory behavior informs whether to match price, hold position, or escalate to legal counsel. A competitor pricing persistently below apparent variable cost in a segment it has not historically prioritized warrants structured analysis, not an automatic response.
Algorithmic pricing risk. Automated pricing engines in B2B platform markets can drift below cost thresholds without human review, creating unintentional legal exposure. Pricing governance platforms that enforce cost-floor guardrails — preventing automated rules from breaching AVC thresholds — reduce this risk directly. Vistaar's price optimization platform supports configurable cost-floor controls within its governed pricing workflows for exactly this reason.
Related Terms
- Limit Pricing: Setting price low enough to deter new entrants without pricing below cost; distinct from predatory pricing because no recoupment phase is required.
- Price Dumping: Selling goods in a foreign market below home-market cost; governed by trade law rather than domestic antitrust.
- Market Penetration Pricing: Below-market pricing to build share in a new market; lawful when not designed to eliminate existing rivals.
- Promotional Pricing: Time-limited discounts to stimulate demand; generally lawful and not structurally connected to recoupment.
- Price Floor: The minimum price threshold below which a firm's pricing policy will not go, often set at or above AVC to maintain legal and margin compliance.
