Why is predatory pricing generally considered an unprofitable strategy for a company to use over the long term?

• A. Because the company incurs losses by setting prices below cost, and competitors may re-enter the market once prices return to normal levels.
• B. Because predatory pricing always leads to increased market share and higher profits.
• C. Because consumers prefer higher prices and will avoid companies that use predatory pricing.
• D. Because government regulations require companies to maintain high prices at all times.

Answer: (A)

Verified step by step guidance

1. Understand the concept of predatory pricing: it involves a company setting prices below its costs with the intention of driving competitors out of the market.
2. Recognize that setting prices below cost means the company incurs losses during the period of predatory pricing, which impacts its profitability negatively in the short term.
3. Consider the strategic goal: the company hopes to eliminate competitors and then raise prices to recoup losses and earn higher profits later.
4. Analyze the risk that competitors may re-enter the market once prices return to normal levels, which can prevent the company from sustaining higher prices and profits.
5. Conclude that because of the initial losses and the possibility of market re-entry by competitors, predatory pricing is generally unprofitable over the long term.