Are well-funded, industry-disrupting market entrants in the sharing economy engaging in unlawful predatory pricing? Some have raised concerns that popular ride sharing services and other similar startups have created a dangerous probability of a monopoly by implementing business models that are designed to gain market-share by initially operating at a loss. These companies have raised enormous amounts of capital to fund their expansion and customer acquisition strategies. If the Federal Trade Commission (FTC) considered such behavior to constitute predatory pricing, it could have large enormous implications for start-ups going forward, in the sharing economy and many other industries. However, recent comments by FTC officials imply that the Commission is not yet ready to disrupt these markets with enforcement actions on predatory pricing theories.
At the Fordham Competition Law Institute’s Antitrust Economics Workshop on September 13, 2017, D. Bruce Hoffman, Acting Director of the FTC’s Bureau of Competition, during a panel discussion, indicated that the FTC is unlikely to pursue predatory pricing claims against companies that simply use investor funds to enter a market without being initially profitable. Hoffman recognized that, “entering [a market] while losing money and being paid for by investors in the hopes of eventually making a profit,” has been a “pretty common entry model” for startups. As a result, proving price predation is “really challenging.” “Most entrants in any industry aren’t profitable on day one,” Hoffman added.
Predatory pricing is the act of selling a good or service below cost to enable a dominant competitor, who has the capital to withstand losses, to knock rivals out of the market. Once competitors exit the market, the dominant competitor can then raise its prices to above-market levels for a substantial time to recoup the losses it incurred and earn substantial profit. This type of textbook market manipulation harms the marketplace and consumers by forcing them to purchase goods and services from a would-be monopolist at prices above competitive levels. The FTC can step in to prevent this sort of harm where it appears that a pricing scheme “is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.”1
Thus, to be predatory in the eyes of regulators, a pricing strategy requires not only an initial phase of providing below-cost services, but also a second step where the dominant market player is able to then raise prices without effective competition. As Maureen K. Ohlhausen, Acting Chairman of the Federal Trade Commission, explained recently at Georgetown University’s Global Antitrust Enforcement Symposium, “a company needs to do more than just sell below cost and drive out rivals. It must somehow put itself in a position where rivals cannot easily re-enter the market once prices rise.”2 Consequently, the FTC and other antitrust enforcers “must find evidence of a barrier that competitors cannot overcome once the price-cutting company raises prices enough to both recoup its earlier losses and to start earning supra-competitive returns.”
These comments suggest that while the FTC will be monitoring startup pricing strategies, it will not move forward with enforcement based on predatory pricing theories unless and until it has reliable evidence that would-be competitors will be unable to reenter the subject markets as prices rise.
A more in-depth discussion on the FTC’s views on the economic and regulatory implications of the growth of “sharing-economy” companies may be found here: FTC Report on Sharing Economy Cautions Regulators Not to Impede Innovation.