Business Strategy of Lowering the Prices and What Uncertainties It May Trigger

Abstract

This paper offers the uncertainty – based economic analysis of lowering the prices as a plausible business strategy. The main problem it attempts to answer is what are the economic risks and uncertainties a business may encounter when lowering the prices and how to set adequate limits to the price competition. Basically it focuses on two types of uncertainties when the competition on the prices is concerned: (1) Inability to assess whether its conduct can possibly be of an anticompetitive nature or not, and (2) the difficulties to understand the legality of the practice performed. Furthermore, this paper analyzes the views of Chicago School scholars on predatory pricing as a business strategy which involves lowering the prices and whether this behavior makes economic sense. To set the adequate economic benchmark for this assessment this papers refers to Areeda/Turner test, average avoidable cost (AAC) test and long-run incremental cost (LRIC) test.