Predatory pricing is a strategy firms use to suppress competition. The predator prices below its own costs to force its rivals out of the market. After they exit, the predator raises its prices to supracompetitive levels and recoups the cost of predation. The Supreme Court has described predatory pricing as “rarely tried” and “rarely successful” and has established a liability standard that is nearly impossible for plaintiffs to satisfy. We argue that one kind of company thinks predatory pricing is worth trying and at least potentially successful—venture-backed startups.
A venture predator is a startup that uses venture finance to price below its costs, chase its rivals out of the market, and grab market share. Venture capitalists (VCs) are motivated to fund predation—and startup founders are motivated to execute it—because it can fuel rapid, exponential growth. Critically, for VCs and founders, a predator does not need to recoup its losses for the strategy to succeed. The VCs and founders just need to create the impression that recoupment is possible, so they can sell their shares at an attractive price to later investors who anticipate years of monopoly pricing. In this Article, we argue that venture predation can harm consumers, distort market incentives, and misallocate capital away from genuine innovations. We consider reforms to antitrust law and securities regulation to deter it.
Interesting read, thanks for sharing. Tangent, I don’t know why this particular example of a bad headline got to me more than others. I really dislike the headline because it’s not official. Laws...
Interesting read, thanks for sharing.
Tangent, I don’t know why this particular example of a bad headline got to me more than others. I really dislike the headline because it’s not official. Laws or regulations haven’t subscribed to this paper, now have judgements. The article is interesting and more reserved but the headline gives the idea of systemic change that just hasn’t happened yet. Again, I’m probably overreacting as there are tons of bad headlines…
This is an extremely important and interesting argument to make: The large VC-funded companies are running at losses through predatory pricing, which is illegal almost everywhere. That squeezes...
This is an extremely important and interesting argument to make:
The large VC-funded companies are running at losses through predatory pricing, which is illegal almost everywhere.
That squeezes out any possibility for competition. So when you gain sufficient scale, you increase prices and make your lost money back.
For upstarts, that's a huge, huge issue. It's how all these tech-company investment bets work and why the potential profits are so huge.
I believe Amazon, started in 1997, has been profitable since sometime in 2001.
So for these established companies, this "venture predation" still doesn't solve the issues. Other regulation is needed.
Google also runs at huge profit margins with billions of dollars in quarterly profit. This path of venture predation doesn't deal with the (legal) scale-advantages that make it impossible for anyone to compete effectively.
My issue with this sort of argument is that people aren’t very consistent about how they think about prices, which is understandable (often they’re different people) but also they don’t...
Exemplary
My issue with this sort of argument is that people aren’t very consistent about how they think about prices, which is understandable (often they’re different people) but also they don’t acknowledge that there are other points of view that are also valid.
If prices are too high, that’s straightforwardly bad. The rent is too damn high, am I right? Except that there are weird people like me who argue that higher gasoline prices (for example) are Actually Good because they encourage energy conservation. Nobody I talk to is all that convinced, though?
If prices are too low, that’s also bad? The trick is to take the viewpoint of a competitor and stop caring about what customers have to pay. So, Walmart competing with local businesses is bad and Amazon driving local bookstores out of business is bad. But an opposing argument is that making competitors unhappy about low prices is what competition is supposed to do. Also, technology improvements are supposed to result in lower prices sometimes, so the old way isn’t competitive anymore. That’s normal for innovation.
What if you make it free? That’s good, unless it’s bad. For example, Google and Facebook have been giving away free Internet services since they were founded. Trying to get people to pay for YouTube is an outrage, and also, they drove competition out of business with free video hosting.
Paying for your own music subscription is for chumps, and also, Spotify doesn’t pay artists enough. Losing money on every sale is predatory and making a profit on every sale is price gouging.
I think it actually is true that some prices can be too high and others too low and it all depends on context, so often these aren’t direct contradictions, but I think it’s useful to remember that you can make an argument about a price from many points of view, and these views are often in tension because a price can’t be higher and lower at the same time.
There is no obviously morally correct price. This is particularly true when we talk about prices at an abstract level. Prices are often based on very specific conditions. A lot of times, how people feel about a price depends on what they’re used to.
So, when I see “price gouging” (price too high) or “predatory pricing” (price too low) I get skeptical, particularly when it’s in the abstract. I’d like to see some kind of coherent argument about what price range is okay and why. That’s going to depend on specifics and we should expect the specifics to change. Where there should be an argument, often there is name-calling and an assumption that people will know what you mean.
Except when prices are so low that no competitors can afford to match the price and stay open. Price gouging drives competitors out of business, at which point the remaining business(es) can raise...
But an opposing argument is that making competitors unhappy about low prices is what competition is supposed to do.
Except when prices are so low that no competitors can afford to match the price and stay open. Price gouging drives competitors out of business, at which point the remaining business(es) can raise their prices to make a profit and consumers have no choice but to pay whatever price that is.
Yes, that’s a theory. How it plays out will depend on circumstances. My impression is that Walmart and Costco still have pretty low prices after many decades?
Yes, that’s a theory. How it plays out will depend on circumstances. My impression is that Walmart and Costco still have pretty low prices after many decades?
And how did they do that? With their dominance, they amassed such a large purchase base they pressure manufactures to make shoddier versions of their goods to sell at walmart for lower prices.
And how did they do that?
With their dominance, they amassed such a large purchase base they pressure manufactures to make shoddier versions of their goods to sell at walmart for lower prices.
Yes, it's well known that they pressure manufacturers to lower their prices, and sometimes this is through cheaper parts and materials. This is sometimes implicitly doing what the customer wanted....
Yes, it's well known that they pressure manufacturers to lower their prices, and sometimes this is through cheaper parts and materials. This is sometimes implicitly doing what the customer wanted. By shopping at Walmart, aren't you saying you would prefer to get it cheaper? Another example is that people who buy tools at Harbor Freight are generally aware of their reputation and know what to expect.
There's a sense in which Walmart's buyers (and those of other discount stores) are working for consumers to get them cheaper prices than they could without collective bargaining. This is somewhat like how a union can get better wages for workers through collective bargaining. (This is called countervailing power.)
"Cost engineering" can also happen when manufacturers sell their products outside Walmart, though, including when they sell things for higher prices through fancy stores. Other retailers with a reputation to protect might be more concerned with quality, so they might, for example, do a lot of QA testing to make sure that the Chinese factories manufacturing their products don't do a slow fade on quality. Or a bike store might quietly fix up anything that broke during shipping so that the customer doesn't see it.
Cost-cutting can be done well or badly, and that's subjective. It can even be environmentally friendly when it's removing unnecessary material. This is another example of how there is no morally correct price, there are only points of view.
Some deals are a lot worse than you can get elsewhere, though.
There's a huge range of "acceptable prices" in the range between predatory pricing (illegally low) and price gouging (leveraging monopoly/anti-competitiveness for high prices). I completely agree...
There's a huge range of "acceptable prices" in the range between predatory pricing (illegally low) and price gouging (leveraging monopoly/anti-competitiveness for high prices).
I completely agree that in that range, market conditions vary and there's no objective way of determining what's too expensive and what's too cheap.
But there are clearly several conditions where prices are objectively too high or too low in the extremes outside the range of acceptable prices.
It'd absolutely be immorally wrong to have gas prices that drive people to polluting way, way more than they should just because it's so cheap they don't have to think about the effects. Many of the negative effects are also just pushed onto others. Many petro-states that subsidize oil/gas fall in under these clearly too low prices.
That's separate from predatory pricing though.
Let's say I have a bajillion dollars in the bank. I give out taxi rides for next to nothing and spend part of my bajillions until all other taxi companies go bankrupt. No-one in their right mind is willing to start a competitor, because they know I can just force them out of business. These prices are clearly and objectively too low. They're predatory. I'm using artificially low prices that I bankroll myself to create a future monopoly. I'm systematically running at a loss to force others with a smaller bank account to go out of business before I do.
For those that argue "but new companies can just outcompete you when you raise prices after establishing your monopoly": at that point you've got such a dominance that your unit costs are so much lower than anyone else can have that you can have legally low prices that are just more competitive than others.
I do agree that sometimes prices actually are too high or too low. It still has to be argued case by case, though. I’ve noticed that prices for rides in cars went down for a while and then they...
I do agree that sometimes prices actually are too high or too low. It still has to be argued case by case, though.
I’ve noticed that prices for rides in cars went down for a while and then they went up again, and also, traditional taxis are still around. So if that was intended as predatory pricing, it doesn’t seem to have worked? Competition hasn’t stopped. We can pay with a smartphone now, though.
There are other industries considered to be natural monopolies, like utilities.
There is a whole history of Google being sued for antitrust violations based on interpretations of the Antitrust laws that are commonly accepted by American courts though. The predatory pricing...
There is a whole history of Google being sued for antitrust violations based on interpretations of the Antitrust laws that are commonly accepted by American courts though. The predatory pricing angle is something that used to be illegal and should be again, but as the article explains is currently not illegal in the US.
Edit see @nacho reply. I was wrong about predatory pricing.
I can't find anything newer at the Justice Department than from 2015, but they seem pretty clear that predatory pricing is a thing, is very illegal and that the courts' interpretations are wrong...
The Brooke group case that's cited in the submission article is from 1993. Most seem to agree that the Supreme court just requires way too much evidence for something to be illegal predatory pricing. The law is clear that it's illegal behavior, but the standard of evidence is close to impossible to reach:
To convict someone of predatory pricing, you have to show a "likelihood" that the company's pricing practices don't just affect rival companies but the whole market.
That's the 1993 court's way of proving that your attempt at creating a monopoly is likely to succeed, which is a crazy high standard. What's going on is clearly illegal, but what's sufficient proof?
Thank you for your reply and the information. I'm not going to edit my mistaken comment. As an aside,. there is a similar court interpretation created impossible standard for disability discharge...
Thank you for your reply and the information. I'm not going to edit my mistaken comment.
As an aside,. there is a similar court interpretation created impossible standard for disability discharge of student loans in bankruptcy. The Brunner test has made it nearly impossible to discharge student loans for disability in bankruptcy court.
As you point out, this is a huge problem in a lot of areas: The Supreme Court isn't being corrected by lawmakers making new laws to "unbreak" their judgements/interpretations of laws. Washington...
As you point out, this is a huge problem in a lot of areas: The Supreme Court isn't being corrected by lawmakers making new laws to "unbreak" their judgements/interpretations of laws. Washington is too broken to get things done.
The Supreme Court's interpretations are too removed from real life so they render the situation unworkable.
As you point out, new laws need to be written to force the courts to correct their courses.
I feel like this issue is at the heart of the 'liberal vs. progressive' discussion that goes on in my family. We're all fairly left leaning, but the older generation is just insistent that...
I feel like this issue is at the heart of the 'liberal vs. progressive' discussion that goes on in my family. We're all fairly left leaning, but the older generation is just insistent that capitalism works. My wife and I say its rotten to the core.
I think the Vulture Capitalism con has been fairly transparent for a while, as are 50 other abuses (pay for features monthly on a car you own, digital property you own just disappears from a platform, etc.) because our current system practically ensures only bad actors can succeed by tilting the odds so far in favor of unfettered greed.
Of fucking course you can make money off people by putting them over a barrel; it's not business savvy, it's being an asshole.
It seems to me, at it's core, this strategy is basically a pump and dump. Early VCs invest money create a hype juggernaut claiming everything under the sun, with the intended dubious strategy of...
It seems to me, at it's core, this strategy is basically a pump and dump.
Early VCs invest money create a hype juggernaut claiming everything under the sun, with the intended dubious strategy of "gaining market share" and cash out when these companies go public or achieve certain financial milestones.
Pump and dumps are illegal, these guys just hide under a few layers of obfuscation, plausible deniability, and pepper in some hyperbolic tech jargon.
Its the same old scams with a fresh coat of paint.
In a new paper titled "Venture Predation," the two lawyers make a compelling case that the classic model of venture capital — disrupt incumbents, build a scalable platform, move fast, break things — isn't the peak of modern capitalism that Silicon Valley says it is. According to this new thinking, it's anticapitalist. It's illegal. And it should be aggressively prosecuted, to promote free and fair competition in the marketplace.
Posting links to archive.is is okay, but on Tildes we link to the original website and put the archive link in a comment. Also, changing the headline is okay, but we generally try to make them...
Posting links to archive.is is okay, but on Tildes we link to the original website and put the archive link in a comment.
Also, changing the headline is okay, but we generally try to make them less like clickbait than the original. This isn’t “official;” it’s an interesting legal theory that the courts may or may not buy.
Here’s the paper, by two law professors. It’s a free download.
Venture Preditation by Matthew Wansley and Samuel Weinstein
Interesting read, thanks for sharing.
Tangent, I don’t know why this particular example of a bad headline got to me more than others. I really dislike the headline because it’s not official. Laws or regulations haven’t subscribed to this paper, now have judgements. The article is interesting and more reserved but the headline gives the idea of systemic change that just hasn’t happened yet. Again, I’m probably overreacting as there are tons of bad headlines…
This is an extremely important and interesting argument to make:
The large VC-funded companies are running at losses through predatory pricing, which is illegal almost everywhere.
That squeezes out any possibility for competition. So when you gain sufficient scale, you increase prices and make your lost money back.
For upstarts, that's a huge, huge issue. It's how all these tech-company investment bets work and why the potential profits are so huge.
I believe Amazon, started in 1997, has been profitable since sometime in 2001.
So for these established companies, this "venture predation" still doesn't solve the issues. Other regulation is needed.
Google also runs at huge profit margins with billions of dollars in quarterly profit. This path of venture predation doesn't deal with the (legal) scale-advantages that make it impossible for anyone to compete effectively.
My issue with this sort of argument is that people aren’t very consistent about how they think about prices, which is understandable (often they’re different people) but also they don’t acknowledge that there are other points of view that are also valid.
If prices are too high, that’s straightforwardly bad. The rent is too damn high, am I right? Except that there are weird people like me who argue that higher gasoline prices (for example) are Actually Good because they encourage energy conservation. Nobody I talk to is all that convinced, though?
If prices are too low, that’s also bad? The trick is to take the viewpoint of a competitor and stop caring about what customers have to pay. So, Walmart competing with local businesses is bad and Amazon driving local bookstores out of business is bad. But an opposing argument is that making competitors unhappy about low prices is what competition is supposed to do. Also, technology improvements are supposed to result in lower prices sometimes, so the old way isn’t competitive anymore. That’s normal for innovation.
What if you make it free? That’s good, unless it’s bad. For example, Google and Facebook have been giving away free Internet services since they were founded. Trying to get people to pay for YouTube is an outrage, and also, they drove competition out of business with free video hosting.
Paying for your own music subscription is for chumps, and also, Spotify doesn’t pay artists enough. Losing money on every sale is predatory and making a profit on every sale is price gouging.
I think it actually is true that some prices can be too high and others too low and it all depends on context, so often these aren’t direct contradictions, but I think it’s useful to remember that you can make an argument about a price from many points of view, and these views are often in tension because a price can’t be higher and lower at the same time.
There is no obviously morally correct price. This is particularly true when we talk about prices at an abstract level. Prices are often based on very specific conditions. A lot of times, how people feel about a price depends on what they’re used to.
So, when I see “price gouging” (price too high) or “predatory pricing” (price too low) I get skeptical, particularly when it’s in the abstract. I’d like to see some kind of coherent argument about what price range is okay and why. That’s going to depend on specifics and we should expect the specifics to change. Where there should be an argument, often there is name-calling and an assumption that people will know what you mean.
Except when prices are so low that no competitors can afford to match the price and stay open. Price gouging drives competitors out of business, at which point the remaining business(es) can raise their prices to make a profit and consumers have no choice but to pay whatever price that is.
Yes, that’s a theory. How it plays out will depend on circumstances. My impression is that Walmart and Costco still have pretty low prices after many decades?
And how did they do that?
With their dominance, they amassed such a large purchase base they pressure manufactures to make shoddier versions of their goods to sell at walmart for lower prices.
Yes, it's well known that they pressure manufacturers to lower their prices, and sometimes this is through cheaper parts and materials. This is sometimes implicitly doing what the customer wanted. By shopping at Walmart, aren't you saying you would prefer to get it cheaper? Another example is that people who buy tools at Harbor Freight are generally aware of their reputation and know what to expect.
There's a sense in which Walmart's buyers (and those of other discount stores) are working for consumers to get them cheaper prices than they could without collective bargaining. This is somewhat like how a union can get better wages for workers through collective bargaining. (This is called countervailing power.)
"Cost engineering" can also happen when manufacturers sell their products outside Walmart, though, including when they sell things for higher prices through fancy stores. Other retailers with a reputation to protect might be more concerned with quality, so they might, for example, do a lot of QA testing to make sure that the Chinese factories manufacturing their products don't do a slow fade on quality. Or a bike store might quietly fix up anything that broke during shipping so that the customer doesn't see it.
Cost-cutting can be done well or badly, and that's subjective. It can even be environmentally friendly when it's removing unnecessary material. This is another example of how there is no morally correct price, there are only points of view.
Some deals are a lot worse than you can get elsewhere, though.
There's a huge range of "acceptable prices" in the range between predatory pricing (illegally low) and price gouging (leveraging monopoly/anti-competitiveness for high prices).
I completely agree that in that range, market conditions vary and there's no objective way of determining what's too expensive and what's too cheap.
But there are clearly several conditions where prices are objectively too high or too low in the extremes outside the range of acceptable prices.
It'd absolutely be immorally wrong to have gas prices that drive people to polluting way, way more than they should just because it's so cheap they don't have to think about the effects. Many of the negative effects are also just pushed onto others. Many petro-states that subsidize oil/gas fall in under these clearly too low prices.
That's separate from predatory pricing though.
Let's say I have a bajillion dollars in the bank. I give out taxi rides for next to nothing and spend part of my bajillions until all other taxi companies go bankrupt. No-one in their right mind is willing to start a competitor, because they know I can just force them out of business. These prices are clearly and objectively too low. They're predatory. I'm using artificially low prices that I bankroll myself to create a future monopoly. I'm systematically running at a loss to force others with a smaller bank account to go out of business before I do.
For those that argue "but new companies can just outcompete you when you raise prices after establishing your monopoly": at that point you've got such a dominance that your unit costs are so much lower than anyone else can have that you can have legally low prices that are just more competitive than others.
I do agree that sometimes prices actually are too high or too low. It still has to be argued case by case, though.
I’ve noticed that prices for rides in cars went down for a while and then they went up again, and also, traditional taxis are still around. So if that was intended as predatory pricing, it doesn’t seem to have worked? Competition hasn’t stopped. We can pay with a smartphone now, though.
There are other industries considered to be natural monopolies, like utilities.
Amazon first reported profit in the fourth quarter of 2003. Just fyi.
Ah sorry. You're right.
There is a whole history of Google being sued for antitrust violations based on interpretations of the Antitrust laws that are commonly accepted by American courts though. The predatory pricing angle is something that used to be illegal and should be again, but as the article explains is currently not illegal in the US.
Edit see @nacho reply. I was wrong about predatory pricing.
I can't find anything newer at the Justice Department than from 2015, but they seem pretty clear that predatory pricing is a thing, is very illegal and that the courts' interpretations are wrong if you look at the laws on the books: https://www.justice.gov/atr/predatory-pricing-strategic-theory-and-legal-policy
The Brooke group case that's cited in the submission article is from 1993. Most seem to agree that the Supreme court just requires way too much evidence for something to be illegal predatory pricing. The law is clear that it's illegal behavior, but the standard of evidence is close to impossible to reach:
That's the 1993 court's way of proving that your attempt at creating a monopoly is likely to succeed, which is a crazy high standard. What's going on is clearly illegal, but what's sufficient proof?
Thank you for your reply and the information. I'm not going to edit my mistaken comment.
As an aside,. there is a similar court interpretation created impossible standard for disability discharge of student loans in bankruptcy. The Brunner test has made it nearly impossible to discharge student loans for disability in bankruptcy court.
Today's google search showed me that there is recent movement and hope that I was not aware of.
A California court has urged judges to lower the bar to finding disability for purposes of discharge in bankruptcy. https://www.moneywiselaw.com/discharging-student-loans-bankruptcy-california-love/#:~:text=The%20law%2C%20he%20says%2C%20is,a%20preponderance%20of%20the%20evidence.
The federal government has offered disability based remedies for federal student loans. https://studentaid.gov/manage-loans/forgiveness-cancellation/disability-discharge
As you point out, this is a huge problem in a lot of areas: The Supreme Court isn't being corrected by lawmakers making new laws to "unbreak" their judgements/interpretations of laws. Washington is too broken to get things done.
The Supreme Court's interpretations are too removed from real life so they render the situation unworkable.
As you point out, new laws need to be written to force the courts to correct their courses.
I feel like this issue is at the heart of the 'liberal vs. progressive' discussion that goes on in my family. We're all fairly left leaning, but the older generation is just insistent that capitalism works. My wife and I say its rotten to the core.
I think the Vulture Capitalism con has been fairly transparent for a while, as are 50 other abuses (pay for features monthly on a car you own, digital property you own just disappears from a platform, etc.) because our current system practically ensures only bad actors can succeed by tilting the odds so far in favor of unfettered greed.
Of fucking course you can make money off people by putting them over a barrel; it's not business savvy, it's being an asshole.
It seems to me, at it's core, this strategy is basically a pump and dump.
Early VCs invest money create a hype juggernaut claiming everything under the sun, with the intended dubious strategy of "gaining market share" and cash out when these companies go public or achieve certain financial milestones.
Pump and dumps are illegal, these guys just hide under a few layers of obfuscation, plausible deniability, and pepper in some hyperbolic tech jargon.
Its the same old scams with a fresh coat of paint.
Posting links to archive.is is okay, but on Tildes we link to the original website and put the archive link in a comment.
Also, changing the headline is okay, but we generally try to make them less like clickbait than the original. This isn’t “official;” it’s an interesting legal theory that the courts may or may not buy.
Thanks for letting me know. Thanks to whoever changed the link. Re the title, I just copied what was on the archive link that I had.