Support
Increasing production and lowering prices below costs, a firm may convince its competitors that it has achieved a lower cost of production than they— competitors may be led to believe the firm has high volume and low costs and may therefore believe it is not below cost but rather reflects greater business efficiency. It could lead them to conclude that competing would not be profitable. This is known as low-cost signaling. Eventually a small competitor may not have the resources to stay in business if a larger predator continues predatory pricing for long enough. However, this only suggests that a company might be able to successfully price other firms out of the market—there is no evidence to support the theory that the virtual monopoly could then raise prices, for as soon as they did that, other firms would rapidly be able to enter the market and compete. Anyhow most of outsiders are afraid to entering monopolized market. Such entering demands a lot of capital investments, which would not be repaid soon due to sharp decreasing of prices at the market provoked by resumption of competition. Another serious barriers to entering at the monopolized market, such as using by monopolies an intellectual property (patent protection), production and technological experience effect (first-mover advantage), high buyer switching costs (for example a lot of PC users are still use Microsoft products that switching to an alternative product would create significant costs for them) and control of key inputs and technologies (for example, power grids by power generating monopolies) usually making monopolised markets very complicated for outsiders in properties of Laissez-faire capitalism.
Read more about this topic: Predatory Pricing
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