Predatory Pricing?

Discussion in 'Legal Issues' started by Kestal, Mar 14, 2008.

  1. #1
    I was told that something I plan to do might be considered predatory pricing. I am toying with the idea to open up an anime video store in the future (going through the proper channels, of course), but I had an idea of including a rental option. Anime is growing quite nicely in popularity but there is not much competition locally.

    because importing these DVD's from distributors is rather costly (even at a low bulk), I thought about using profits from rentals to offset the prices of my 'to buy' DVD's to a manageable level. We only really have 1 store that is set up locally that sells a good selection of anime (but isn't well known, mostly due to poor marketing and location, etc etc).

    Even though my intent is not to push them out of business (as they have a rental selection of their own, but more mainstream), would my offsetting the prices be considered illegal/predatory pricing?

    I know Amazon recently got caught for their free shipping services, but what would the severity of my situation be? I just remember hearing something about this in one of marketing classes a while back, but we kind of skipped over a bit of the competition act to save time....... go college. -_-;

    Would I only have to be worried if I go with the same distributor as them and offer a lower price or below base price?

    Anyway, thanks for any help, advice, or suggestions!
     
    Kestal, Mar 14, 2008 IP
  2. bluegrass special

    bluegrass special Peon

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    #2
    Amozon only got in trouble in France. When they refused to stop shipping for free, France ardered them to pay 1,000 euros a day until they stopped. Amazon happily pays the 1,000 euros a day rather than end free shipping to it's French consumers.

    For informational purposes only, the FTC has not been able to sucessfully prosecute a predatory pricing case since before 1993 (when the US Supreme Court basically said predatory pricing is an irrational theroy that has hardly been used, even less so effectively, and has never created a monopoly).

    The idea you have does in theory describe a part of recognized predatory practices, but in practice I don't think your plan would be predatory pricing. As long as you don't price the DVDs so low that you are making little to no profit on them, I don't think you have any legal problems.
     
    bluegrass special, Mar 14, 2008 IP
  3. Kestal

    Kestal Peon

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    #3
    Thanks for the quick reply Bluegrass.

    On that note, it would only be considered predatory if I set the price so I do not get any profit from it? (or lower)?
     
    Kestal, Mar 14, 2008 IP
  4. bluegrass special

    bluegrass special Peon

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    #4
    No, it could be considered predatory even if you did make profit. However, not making any profit or losing profit is stronger evidence of predatory pricing. Predatory pricing is usually hard to prove and reserved for large corporations (not single storefronts). It also depends on whether your prices are always like that (for example, the discontinued rack at Target is not predatory even though they may lose on those items, they are clearancing them so they can replace them with other products).

    Also check your state's laws. Some states have their own pricing laws that may stipulate a minimum percentage over cost.
     
    bluegrass special, Mar 14, 2008 IP
    Kestal likes this.
  5. Kestal

    Kestal Peon

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    #5
    kk, thanks again :)
     
    Kestal, Mar 14, 2008 IP
  6. RelevantBuZZ_PR

    RelevantBuZZ_PR Guest

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    #6
    Circuit City is rather notorious for doing that...Many here call it "black balling". Best Buy and Walmart too. Yet, who's going to attack larger companies, like Walmart? Keep in mind too that their DVD sales don't count much to their revenue. Such with Circuit City and Best Buy, they rely on their electronic sales.

    Generally, you can get in trouble if you sell the DVDs lower than what you bought them for. If you're going to offset a price, rip out the middle man (such as one-stop-shops/warehouses) and buy straight from the distributers. Work out a deal with them. Or sell used DVDs.
     
    RelevantBuZZ_PR, Mar 14, 2008 IP
  7. dvdbundles

    dvdbundles Peon

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    #7
    Most Mass Merchants sell their DVDs for less than you can buy them from vendors.

    Loss leader
    http://en.wikipedia.org/wiki/Loss_leader

    Resale price maintenance
    http://en.wikipedia.org/wiki/Resale_price_maintenance

    Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. ___ (2007), was a case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act, replacing the older doctrine with the rule of reason.

    The decision overruled a long-standing precedent, Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
     
    dvdbundles, Mar 19, 2008 IP
  8. bluegrass special

    bluegrass special Peon

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    #8
    Relevant, I think you'll find most predatory pricing cases are against large corporations. Small businesses just do not have the money, broad range of products, or the large consumer base to pull off predatory pricing. In the attempt to drive competition out of business, most small businesses would drive themselves out of business.

    There have been successful cases against Walmart in several states and even other countries. A M$ is way more likely to face one of these cases than a corner video store.
     
    bluegrass special, Mar 19, 2008 IP
  9. RelevantBuZZ_PR

    RelevantBuZZ_PR Guest

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    #9
    I'm assuming your replying to my statement, "Yet, who's going to attack larger companies, like Walmart?" I was referring to the fact that these larger companies have a lot of pull in the market. Their consumer base is huge. Movie companies and distributers will be at risk of losing revenue if they were to lose contracts with Walmart, Circuit City and Best Buy.

    Now the heart of the matter. Predatory Pricing, Loss Leaders...Again, contract with the distributers and movie/music companies. Simple as that. Decide to sell prices that are below their marketing or advertising price can run you the risk of a lawsuit.

    Judgement in cases are good for reference. Don't make the mistake thinking that the judgement will apply to all future related cases.
     
    RelevantBuZZ_PR, Mar 19, 2008 IP
  10. bluegrass special

    bluegrass special Peon

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    #10
    The current thinking (at least in the US) is that predatory pricing (which is a type of antitrust suit) is only applicable to large corporations. The hurdles the Supreme Court put on proving a predatory pricing case in 1993 (Brook Group v. Brown & Williamson Tobacco) have essentially limited the laws that govern predatory pricing. In addition to prices having to be below cost, one must show the pricing structure is likely to affect the market in general as well as rivals, and that there is no likelihood that after the "predator" raises its prices (after competition has been driven out) that new entrants will be able to make money. So even if you drive out competition, if new competition can come in after you have raised your prices, then there is no predatory pricing.
     
    bluegrass special, Mar 20, 2008 IP
  11. RelevantBuZZ_PR

    RelevantBuZZ_PR Guest

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    #11
    Here in Hawaii, we have an ongoing price war with the local airlines. One airline, which has a parent backing, dropped the airfares so low it nearly forced the other two airlines out of business. The other two companies had no choice but to drop their airfares too. One filed for bankruptcy. The prices have leveled off now and the 2 companies are hanging on. I'm curious to see how it all plays out in the courts.

    I don't know where you are in the states but here a lot of businesses folded due to Circuit City, Best Buy and Walmart. They simply could not compete. These 3 massive store chains set competitive prices with their DVDs. Virtually all titles are the same, give or take a dollar or two. In the end they equal out.

    As stated before, the DVD argument for these 3 chains isn't a factor since it is their other products that are generating the revenue. Blockbusters would be the closest DVD competitor but it's their rentals (local and online) that keeps them afloat. *Netflix cringed when Blockbusters moved online (but were saved by guess who). There isn't a way another company that focuses on DVDs can match with any of these chains except if they offer something different, such as subscriptions.

    Predator pricing is all around.
     
    RelevantBuZZ_PR, Mar 20, 2008 IP
  12. bluegrass special

    bluegrass special Peon

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    #12
    What you think of as predatory pricing and what the courts recognize as predatory pricing are not the same. The whole point of my posts above is that a store like Walmart is the only type of store that is generally recognized by the courts as being able to be guilty of predatory pricing. A business with a single product is not likely to be found guilty of predatory pricing because it is not a business model that can be sustained without the support of other products. A Walmart is much more likely to be found guilty of predatory pricing than an airline.
     
    bluegrass special, Mar 21, 2008 IP
  13. RelevantBuZZ_PR

    RelevantBuZZ_PR Guest

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    #13
    It's more likely chains like Walmart will be found guilty of predatory pricing than utility, telephone and internet companies too. It doesn't mean that predatory pricing doesn't exist in these areas. It just means (as you've stated) it's more difficult to prove.
     
    RelevantBuZZ_PR, Mar 21, 2008 IP
  14. bluegrass special

    bluegrass special Peon

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    #14
    No, actually according to the courts it doesn't exist. At least those three requirements I listed must be met in order to be predatory pricing. And even then it may not be. Even if I lower my prices below cost and succeed in driving out all my competition, if it is likely that when I reraise the prices new competition can start up (or it looks like I can keep those prices below cost indefinately) then what I have done is not predatory pricing. By the definition of predatory pricing set forth by the Supreme Court in 1993, only large companies that either a. have a wide range of products of which they can price some predaciously and recoup losses on other products and/or b. operate in many geographic regions where prices in one region are lowered and propped up by prices in another region have any chance of being found guilty of predatory pricing.

    That is not to say a business cannot be found guilty of some other illegal business pricing, but it won't be predatory. People throw the term around for just about anything, but in reality predatory pricing is a strategy alleged by plaintiffs in anti-trust suits. Prices below cost in and of itself is not legally enough to be deemd as predatory pricing.
     
    bluegrass special, Mar 21, 2008 IP
  15. RelevantBuZZ_PR

    RelevantBuZZ_PR Guest

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    #15
    While I appreciate that you've gone through the criteria a couple of times I understand what predatory pricing is and have studied the significant 1993 ruling years back. Nonetheless, you may (or may not) be surprised that I admire how you presented your arguments, bluegrass special. Nicely done. :)
     
    RelevantBuZZ_PR, Mar 21, 2008 IP