Smalltown has two family-owned hardware stores that have been in business for years. Major Hardware decides that Smalltown would be a good place to build one of its superstores. Major opens, advertising unbelievably low prices; in fact, at below cost

Question

Because Major owns stores nationally, it is able to keep prices extremely low until both of the family-owned stores have to go out of business because they cannot compete. After Major is the only hardware store in town, it raises its prices enough to make up for its former losses and to make some additional profit. Discuss this behavior in relation to antitrust law.

Answer 1

Major has engaged in predatory pricing. It occurs when a company lowers its prices below cost to drive competitors out of business. Under Section 2 of the Sherman Act, it is illegal to attempt to monopolize. Typically, the goal of a predatory pricing scheme is either to win control of a market or to maintain it. To win a predatory pricing case, the plaintiff must prove three elements: the defendant is selling its products below cost; the defendant intends that the plaintiff go out of business; and if the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses.