I hope I can remember this example next time someone says governments have to break up monopolies because they price competitors out of business.
I used to think predatory pricing was real and justified government intervention, even though I despise government. Then I actually sat down with pen and paper (this was a long time ago) and tried working out real examples and just couldn't make it work. Every small competitor they drove out of business meant they had to raise their prices more to make up for the cost of their previous low prices, which made it that much easier for the next competitor to undercut them. And it also told big competitors that they could now undercut the predator with ordinary prices, and if that started a new round of undercutting price wars, they started out ahead of the game. It eventually occurred to me that it was like a car coasting downhill; it can never get as far up the other side because there are inefficiencies. Perpetual predatory pricing requires a better than perpetual motion machine, so to speak.
Been a long time and I've forgotten all the details, but it was just one more thing which convinced me 99% of what governments use to justify their existence is nonsense.
You don’t have to do it every time, you just have to do it enough to scare people out of investing in a competitor. You think the mafia could afford to break the legs if every business decided not to pay them protection money? No, you just an example a couple of times.
But the mafia has a territorial monopoly, more or less, and they have to publicize what they've done to get any traction. Is a national furniture chain really going to brag with national advertising how they just put a small upstart out of business? That's a lot of money just to tell other small stores how to change tactics and survive longer, and tell the public to wait until the next upstart forces another price war and buy cheaper; if they need anything in the meantime, at least check out the local upstart.
Remember too that they have to undercut upstarts by enough to prevent the upstarts from matching them. That increases their losses and forces them to raise prices even more to recover their losses when the upstart folds. Now the next upstart looks even cheaper in comparison.
Work it out on a pad of paper, a spreadsheet, whatever you want. Predatory pricing is not a winning solution.
Heck, let's try it right now.
Wholesale price of a sofa is $500.
Big Chain sells it for $1000.
Upstart sells similar quality for $800.
Big Chain drops their price to $600. They're losing $400 each.
Upstart quits the sofa business, goes upmarket, sells chairs or bed, whatever; Big Chain wins.
Big Chain raises prices to $1200 to make up the $400 losses.
New upstart comes along, sells that same sofa for $1000.
Big Chain undercuts to $800, but they haven't yet recovered from the $400 losses.
Upstart drops to $800 too.
Big Chain cuts to $600. More $400 losses on top of the old ones, which have not been recovered yet.
Upstart exits the sofa business.
Big Chain now has even more losses to recover. Do they raise prices to $1400, to $1200, or leave them at $1000 and take a permanent hit?
And so on. Big Chain can't win. Meanwhile, upstarts who were selling chairs drop the sofas and stay in business selling chairs or beds. Has Big Chain really scared future upstarts away?
Don't say Big Chain is stockpiling all their excess profits in readiness for price wars. That's a lousy investment. They're spending it, whether for advertising or Cadillacs.
The public school system is not seeking to enroll all possible students, so it's got a 90% monopoly without even trying. Furthermore ~80% of private school students attend a religious school- a market that public schools are legally prevented from entering. Therefore the public school share of the actual addressable market is closer to 98%. Overall this seems like pretty weak evidence towards your thesis.
What do you mean by "The public school system is not seeking to enroll all possible students" ? Are there students or areas which the public school system actively avoids? Homeschooling was effectively illegal until the 80's and 90's in most states, private schools were (and are) very difficult to start most places, and public schools are everywhere as a matter of legislation for all the states. It is illegal to not send your children public school without proving you are schooling them otherwise. Religious schools teach all the same subjects as public schools, albeit with a different perspective, so it isn't as though they are not competing in the same market. So I don't think I get what you mean by the public school system not seeking to enroll all possible students.
This feels totally nonsensical, private schools offer a different quality of goo than public schools, might as well as why the market for tickets on United Airlines has survived the “predatory pricing” of free public highways.
I hope I can remember this example next time someone says governments have to break up monopolies because they price competitors out of business.
I used to think predatory pricing was real and justified government intervention, even though I despise government. Then I actually sat down with pen and paper (this was a long time ago) and tried working out real examples and just couldn't make it work. Every small competitor they drove out of business meant they had to raise their prices more to make up for the cost of their previous low prices, which made it that much easier for the next competitor to undercut them. And it also told big competitors that they could now undercut the predator with ordinary prices, and if that started a new round of undercutting price wars, they started out ahead of the game. It eventually occurred to me that it was like a car coasting downhill; it can never get as far up the other side because there are inefficiencies. Perpetual predatory pricing requires a better than perpetual motion machine, so to speak.
Been a long time and I've forgotten all the details, but it was just one more thing which convinced me 99% of what governments use to justify their existence is nonsense.
You don’t have to do it every time, you just have to do it enough to scare people out of investing in a competitor. You think the mafia could afford to break the legs if every business decided not to pay them protection money? No, you just an example a couple of times.
But the mafia has a territorial monopoly, more or less, and they have to publicize what they've done to get any traction. Is a national furniture chain really going to brag with national advertising how they just put a small upstart out of business? That's a lot of money just to tell other small stores how to change tactics and survive longer, and tell the public to wait until the next upstart forces another price war and buy cheaper; if they need anything in the meantime, at least check out the local upstart.
Remember too that they have to undercut upstarts by enough to prevent the upstarts from matching them. That increases their losses and forces them to raise prices even more to recover their losses when the upstart folds. Now the next upstart looks even cheaper in comparison.
Work it out on a pad of paper, a spreadsheet, whatever you want. Predatory pricing is not a winning solution.
Heck, let's try it right now.
Wholesale price of a sofa is $500.
Big Chain sells it for $1000.
Upstart sells similar quality for $800.
Big Chain drops their price to $600. They're losing $400 each.
Upstart quits the sofa business, goes upmarket, sells chairs or bed, whatever; Big Chain wins.
Big Chain raises prices to $1200 to make up the $400 losses.
New upstart comes along, sells that same sofa for $1000.
Big Chain undercuts to $800, but they haven't yet recovered from the $400 losses.
Upstart drops to $800 too.
Big Chain cuts to $600. More $400 losses on top of the old ones, which have not been recovered yet.
Upstart exits the sofa business.
Big Chain now has even more losses to recover. Do they raise prices to $1400, to $1200, or leave them at $1000 and take a permanent hit?
And so on. Big Chain can't win. Meanwhile, upstarts who were selling chairs drop the sofas and stay in business selling chairs or beds. Has Big Chain really scared future upstarts away?
Don't say Big Chain is stockpiling all their excess profits in readiness for price wars. That's a lousy investment. They're spending it, whether for advertising or Cadillacs.
Insightful.
The public school system is not seeking to enroll all possible students, so it's got a 90% monopoly without even trying. Furthermore ~80% of private school students attend a religious school- a market that public schools are legally prevented from entering. Therefore the public school share of the actual addressable market is closer to 98%. Overall this seems like pretty weak evidence towards your thesis.
What do you mean by "The public school system is not seeking to enroll all possible students" ? Are there students or areas which the public school system actively avoids? Homeschooling was effectively illegal until the 80's and 90's in most states, private schools were (and are) very difficult to start most places, and public schools are everywhere as a matter of legislation for all the states. It is illegal to not send your children public school without proving you are schooling them otherwise. Religious schools teach all the same subjects as public schools, albeit with a different perspective, so it isn't as though they are not competing in the same market. So I don't think I get what you mean by the public school system not seeking to enroll all possible students.
This feels totally nonsensical, private schools offer a different quality of goo than public schools, might as well as why the market for tickets on United Airlines has survived the “predatory pricing” of free public highways.
This is a really amazing essay!
🤮
True