Yet again, my economics teacher says that businesses use price dumping to become monopolies. I tried to refute that by showing that other businesses could simply stop producing and wait for the company to sell above cost, or that company is simply more efficient in producing the product. He merely said that the first illustrates my point. Is there really no way to get him to listen to common sense?
Small businesses have lower start up costs, if somebody really did wish to drop their prices and sustain a loss for a while they could. Eventually they’d have to raise their prices and in the meantime they’d be benefitting the customer. The moment they raised their prices they’d face competition from smaller businesses with lower start up costs.
I’d put numbers to it and ask him how this constitutes a legitimate business strategy. Suppose that I own company B and my competitor owns company A. We both make widgets, both sell them for the same price, and both have identical costs, and make a net profit of $10 per widget.
The owner of company A then thinks, why don’t I lower the price of my widgets so that I lose $10 per widget sold times one million widgets per quarter for a loss of $10 million. Company B will then go out of business and I can raise my prices as much as I want.
Then he realizes that, as a competitor, I would check out the company A income statement at the end of the quarter and see that they are selling their product for below cost. I’d lay off my employees and mothball my factory. When company A subsequently increases their prices so that they are now making $20 per widget I’ll immediately restart my factory, selling widgets at a $10 profit. Consequently, Company A has to lower their price to mine. They’re out $10 million with nothing to show for it. Company A isn’t that stupid, so they decide to pursue a different strategy.
I’d then put the burden of proof on him to provide an actual example where this strategy was really used by a publicly traded company. He’ll have to provide actual income statements showing that the cost of goods sold was higher than total income for some period of time while competitors went out of business. He’ll then have to show that this company subsequently raised their prices above previous market prices and made more profit then they had in losses. Government monopolies, such as utility companies, or companies that receive government subsidies or special privileges don’t count. Since you’re paying him to teach you, it’s his responsibility to provide this material. It’ll be interesting to see what he comes up with (if he bothers to try).
Sorry but it is a public school. [:P]
Otherwise, I think I should offer this as a challenge.
This assumes that businesses control the price of the supply of goods. Take cars for example. Even if a company attempted to undersell its competition into extinction, it would have to massively expand production in order to do that because the demand for cars would skyrocket. Then after the competitors had shut down their production, there would still be an immense supply of cars in existence. Because cars are consumed very slowly the company would not be able to restrict the supply and the prices would remain very low, forcing the company into bankruptcy.
Here’s a recent example. US blaming Canada for dumping their oil on the market. I guess American’s don’t want cheap oil. Canadians claim that they were not selling below cost.
http://www.calgaryherald.com/Business/drillers+suggest+Canada+dumping/1364558/story.html
If you want to argue with your prof then this article may help you out:
Both you and your teacher are correct, find an equilibrium point. Nothing is so absolute in life.
The argument is ridiculous. Many businesses lose revenue for extended periods of time. As long as investors and venture capitalists see that the business is profitable in the long run, they will continue to pour money into the company. Amazon, for example, was unprofitable until 2002 (it started in 1994 and went online in 1995). If you purposely cut prices below cost of production, investors will still put their money into your competitors since they see that what you’re doing cannot be continued indefinitely.
Care to explain?
When this debate came up in my ethics class, I chose the short answer route. “So what?” “Good, cheaper goods!” or “A monopoly? Are other business now restricted from entering? That would imply govt. intervention of sorts?” or “If business were still allowed to enter the market, the ‘dumper’ or ‘predator’ would have to somehow sustain losing profits for an extended period of time, right?”
An hour and 40 minutes later, I get a hand shake and a “Your absolutely right”
Everyone, thanks for your input. Time to challenge the teacher.[:)]
Do not challenge, but present questions. He is a teacher, he is obligated to answer.(especially in front of students).
Taking the side of a consumer demanding lower prices is a very easy and likable stance. It seems to put the teacher on the side of a controlling govt. or jealous business. People like low prices, not authority.(at least college students) Its agood flip around, forces the teacher and students to enter the other pair of shoes.