Question

Larry and Susan work in an office near Pizzas R Us and Pizzapalooza, pizzerias on the same block. Larry notices that both places are charging only $1.25 for one slice of pizza, which is below the price of $1.75 that one slice of pizza typically costs elsewhere in the city. Susan wonders if Pizzas R Us and Pizzapalooza are engaged in a price war. Over the past month, she has noticed that each store has lowered its prices each week, but that Pizzapalooza always lowered its price first. She suggests that Pizzapalooza is engaging in predatory pricing Larry correctly replies that they cannot determine whether Pizzapalooza is guilty of predatory pricing because

A. to prove that Pizzapalooza engaged in predatory pricing, you would need to prove that the owner of Pizzapalooza threatened the owner of Pizzas R Us to keep him from matching the price cut.
B. to prove that Pizzapalooza engaged in predatory pricing, you would need to prove that the average variable cost of one slice of pizza is $1.25 or less
C. to prove Pizzapalooza engaged in predatory pricing, you would need to prove that Pizzapalooza priced pizza below average variable cost with the specific intention of driving Pizzas R Us out of business.

Answer 1

The answer is C. to prove Pizzapalooza engaged in predatory pricing, you would need to prove that Pizzapalooza priced pizza below average variable cost with the specific intention of driving Pizzas R Us out of business.

What is predatory pricing?

Predatory pricing is when a company sets really low prices on purpose to force other companies to leave the market. In order to prove predatory pricing, we need to show that Pizzapalooza sold their pizza for less than it cost to make, and did it on purpose to put Pizzas R Us out of business.

Threatening or influencing Pizzas R Us or looking at the cost of making one slice of pizza are not the main things that decide if predatory pricing has occurred. The most important thing is to show that Pizzapalooza purposely set a low price for their pizza to hurt their rival.