One of the most common arguments I find friends and colleagues pose to me is the predatory pricing argument. I’ve seen some explanations and offered them up, but generally they are rejected as though they are simply hypothetical cases rather than directly challenging the logic of predatory pricing. But it seems to me, that most viewpoints completely disregard a limited supply.
When one accounts for limited supply, then aren’t predatory prices necessarily below market-clearing prices, causing shortages? In this case, smaller competitors have no need to reduce their prices to compete. In fact, they could raise their prices and still clear their inventory.
Thus, smaller firms would be turning greater profits and be able to expand production, while the larger firms would be turning losses, eventually required to reduce production. Thus, market share flows towards the firm that prices their product consistently in line with both supply and demand, not simply the one that underprices the other.