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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. 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
Expert Answer
Major, the new hardware store in the town has engaged in a predatory pricing. Predatory pricing is the pricing of the products in such a low level that other firms cannot compete and are forced to leave the business. Predatorry pricing is the pricing, which helps to eliminate competition from the market. Companies do this to become monopoly in the market.
Major hardware followed Sherman pricing, by pricing the products 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.
In order 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;
- if the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses.
Such behavior is against the Antitrust law. Antitrust laws – also referred to as “competition laws” – are statutes developed by the U.S. Government protects its consumers from predatory business practices by ensuring that fair competition exists in an open-market economy.
Anti-trust law can be applicable here, where Major and two other family owned hardware stores has to fix the prices to avoid the price wars in the market
