Thursday, November 5, 2009

Predatory Pricing - Real and Imagined

The irony of our antitrust laws is that remedies used to promote competition almost always have the opposite effect. When successful competitors increase market share by offering consumers a better deal, they’re often subject to legal complaints from their less successful rivals. Unfortunately, just as a race handicapping system requires the fastest horses to carry extra weight in order to give the other horses a fair chance, the legal “remedy” normally raises the costs and prices of the most efficient firm.
Mark Perry has posted an an excellent column describing the latest example involving retail book sales. It seems that everybody’s favorite corporate villain, Wal-Mart, as well as rivals and Target, have been pricing many books by popular authors below cost. This has caused smaller retailers to allege that they are engaged in that old anti-competitive ploy used by unscrupulous corporations: predatory pricing. Predatory pricing is based on the hope that the monopolist will be able to recoup its losses by raising prices later on. Both logical and historical evidence suggests that this is nonsense. Actual attempts at predatory pricing are rare, and successful attempts are rarer still. However, there is a significant exception - government services that are priced significantly below the cost of provision.
As economist John Lott has written, our method of providing public education must be counted as one of the most successful predatory pricing schemes of all time. It doesn’t matter how efficient private schools are, they can never compete on equal terms when their rival is offering a zero price and will continue to do so in perpetuity! This artificial disadvantage has caused the demise of many worthwhile private schools and deters new entry from educational entrepreneurs.
At first, this may not appear to fit the model of predatory price cutting. After all, what self-respecting monopolist would maintain their low prices once they’ve driven their rivals from the market? But in fact, free from the threat of competition, the costs of public schools inevitably rise. For example, in the Washington D.C. school district, the cost per student has been estimated to be $25,000 per child. As taxpayers, consumers are responsible for covering these higher costs one way or another. By contrast, the voucher program used to enable Washington D.C. cost only $6000 per student. In spite of evidence that the program was effective, and in spite of the massive increase in spending undertaken as part of the stimulus package, the Senate decided not to renew the program. This is only the latest in a sad series of recent cases where teachers unions have successfully used their political clout to prevent competition. The result has been persistently higher costs and limited choice for consumers. Now that’s the kind of market power that Wal-Mart can only dream of! Where’s the Dept. of Justice when you really need it?

- posted by Dale Matcheck


  1. You make an odd claim, for a capitalist, that public education costs 'nothing.' Surely you have removed your 'all taxes are bad' cap and put on your socialist dark glasses, if only for a moment. Nothing the government does is free, as you are fond of saying, I'm sure.

    Further, it is equally odd that you suggest that private schools are in any trouble whatsoever. Their population is soaring nationwide. Fees are rising and attendance is, too. Eastern schools like Choate Rosemanry are $60,000.00 a year, and they've never been so full.

    I guess my overall point is that when you get doctrinaire you sound as foolish as the people you want to oppose. So you're preaching to the choir.



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