Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 20

A company has several units of old-model telephones that it is selling for $10 per unit. The units cost $25 to produce. Is the company engaging in predatory pricing? Explain.

Step 1 of 2

Predatory pricing:

Predatory pricing is a method in which a firm cut the prices and takes a loss in order to discourage competition. It is a barrier to entry for potential new competitors. Once the competition decreases, then a monopolist is free to raise the prices. If predatory pricing leads to increase in the monopoly power, then it leads to higher prices in long term and harm the public interest.