The act of temporarily pricing a product or service below its cost of production is a strategy intended to eliminate competition. This maneuver involves a firm setting prices so low that other competitors, especially smaller ones, cannot sustain operations and are forced to exit the market. An example could involve a large company drastically reducing the price of a specific product in a particular region to levels that smaller, local companies cannot match, potentially leading to their financial ruin.
This type of aggressive pricing strategy can have significant effects on market structure and consumer welfare. While it may provide short-term benefits to consumers through lower prices, the ultimate outcome can be the creation of a monopoly or oligopoly, leading to higher prices and reduced choices in the long run. Historically, debates surrounding this practice have played a significant role in shaping antitrust and competition laws across various countries, leading to regulatory scrutiny and potential legal action against companies engaging in such behavior.
