There’s a stubborn economic myth that has persisted for
generations centuries (see update below) that goes something like this: An aggressive, predatory firm preys on its competitors by charging below-cost predatory prices in an attempt to drive all of its rivals out of business. If successful, the predatory firm then is rewarded with complete control of the market and it then proceeds to jack up prices to take advantage of its dominant monopoly position. The predatory firm wins, and the rivals and consumers lose.
There’s a good reason the predatory firm/pricing myth remains a myth – this scenario never actually happens. Here’s why — in a market economy, as soon as the predatory firm raises its prices and earns monopoly profits, what happens? The enticing and redolent “smell of profits” attracts new rival firms who enter the industry and then quickly erode the predatory firm’s monopoly profits through vigorous competition and price-cutting. Unless of course the dominant firm has some type of protection against competition and becomes a “coercive monopoly” (like the USPS), which could only happen through some government legislation, regulation or fiat and never through market forces. In fact, a much better and more realistic strategy for the dominant firm to control the market (like Amazon maybe?) would be to keep its prices so low that no rival could successfully compete against it – but that’s not part of the predatory firm/pricing myth.
In the Washington Post yesterday, columnist and “Big Taxi evangelist” Catherine Rampell wrote an op-ed (“Who will win the ridesharing war? Probably not consumers.”) that suggests she has swallowed the predatory firm/pricing myth hook, line and sinker.
Here are a few excerpts:
Medallions and other regulations capping the number of livery cars available are often derided as taxi cartel protectionism.
Well, that’s because those artificial, anti-consumer restrictions are a form of government-enforced taxi cartel protectionism and serve the interests of the government-protected taxi cartel members, not the consumer.
Uber and Lyft are engaged in a price war, which in the short run certainly looks good for consumers.
It looks good to consumers, because well…. low price are good for consumers.
But there’s also the long run to think about. For all the rhetoric about the value of competition, the goal of this price war is to neutralize the competition and become the only livery game in town. Which would mean more market power, over both drivers and consumers, probably to the detriment of both.
Sure, but what’s to stop new rivals from emerging to challenge the “only livery game in town” if Uber or another ride-sharing service could ever unrealistically achieve that monopoly status? Uber or Lyft would have no government-sanctioned protection from competition like the current taxi cartels, and would face vigorous competition from new start-ups, like the new ride-sharing service Gett, which is offering an introductory flat fare of $10 for rides anywhere in Manhattan at any time of day. Therefore the “only livery game in town” anti-consumer outcome with high prices (and poor service) is the major flaw in the predatory firm/pricing myth because it’s pure fantasy for that outcome to ever actually happen.
Finally, “Big Taxi evangelist” Rampell closes her op-ed with this paragraph, demonstrating her belief in the predatory firm/pricing myth:
In other words, for all their bellyaching about the bullies of Big Taxi, Uber and Lyft are becoming pretty big bullies themselves. Nothing about their behavior suggests the ultimate winner of the ride-sharing wars will wield its power beneficently when it controls the market and can raise consumer prices at will. Consumers will just be trading in one monopoly — loathed Big Taxi — for another, less regulated one.
Except there’s a major and very big difference: loathed Big Taxi is loathed for a reason – it has government protection against competition through taxi medallion systems, etc. – something that Uber, Lyft, Sidecar, Gett, Getaround, Zip Car, Car2Go, etc. don’t have. And that’s why “ride-sharing evangelists” (Rampell’s term) are so enthusiastic about the transportation market today – they are no longer at the mercy of Big Taxi’s high prices and poor and limited service and they now have a historically unprecedented number of transportation options including the services of the companies listed above.
This is a great time to invoke the timeless wisdom and insight of French economist Bastist, who four days before his death in 1850 wrote this in a letter to a friend: “Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.” In today’s debate about ride-sharing and transportation options, we should primarily consider the general interest of the consumer, not the special, entrenched interests of Big Taxi. And consumers have clearly and overwhelmingly expressed their preferences – they are “evangelical” about ride-sharing for a very good reason – it’s a much better, cheaper, and faster option than Big Taxi. And they’ve seen the transportation future, and it’s not Big Taxi.
Update: See this related 1992 Cato article “The Myth of Predatory Pricing” by economist Thomas J. DiLorenzo, who writes:
Predatory pricing is one of the oldest big business conspiracy theories. It was popularized in the late 19th century by journalists such as Ida Tarbell….
The predatory pricing argument is very simple. The predatory firm first lowers its price until it is below the average cost of its competitors. The competitors must then lower their prices below average cost, thereby losing money on each unit sold. If they fail to cut their prices, they will lose virtually all of their market share; if they do cut their prices, they will eventually go bankrupt. After the competition has been forced out of the market, the predatory firm raises its price, compensating itself for the money it lost while it was engaged in predatory pricing, and earns monopoly profits forever after.
The theory of predatory pricing has always seemed to have a grain of truth to it — at least to noneconomists — but research over the past 35 years has shown that predatory pricing as a strategy for monopolizing an industry is irrational, that there has never been a single clear-cut example of a monopoly created by so-called predatory pricing, and that claims of predatory pricing are typically made by competitors who are either unwilling or unable to cut their own prices.
Predatory pricing is the Rodney Dangerfield of economic theory–it gets virtually no respect from economists. But it is still a popular legal and political theory….