Which of the following is essential for a business to successfully engage in predatory pricing?

• A. A large number of competitors with equal market share
• B. Perfectly elastic demand for its product
• C. Significant market power or dominance
• D. Strict government price controls

Answer: (C)

Verified step by step guidance

1. Understand the concept of predatory pricing: it involves setting prices low enough to drive competitors out of the market, with the intention to raise prices later once competition is reduced.
2. Identify the key condition for predatory pricing to be successful: the firm must have enough market power or dominance to sustain losses in the short term and then raise prices without losing customers.
3. Analyze why a large number of competitors with equal market share is not essential: predatory pricing is more effective when the firm can influence market prices, which is harder with many equal competitors.
4. Consider the role of demand elasticity: perfectly elastic demand means consumers will switch immediately if prices rise, making predatory pricing less effective; thus, this is not essential.
5. Recognize that strict government price controls prevent firms from lowering prices below a certain level, so predatory pricing cannot be successfully implemented under such controls.