Offering low prices to consumers is the epitome of competitive conduct. Discounting, cost cutting and competing on price are all behaviors welcomed by the Commission.
However, in very limited circumstances an undertaking with a substantial degree of market power may damage competition through pricing below cost. In what is known as predatory pricing, an undertaking may set prices so low that it deliberately makes a loss in an attempt to force one or more other undertakings out of the market and/or in an attempt to otherwise “discipline” competitors. In this context, the undertaking may incur losses in the short run in the expectation that it will be able to charge higher prices in the longer term (for example, following the exit of relevant competitors from the market).
Consumers will ultimately be worse off if competition is weakened in this way, leading to higher prices and reduced product quality and choice.
For further information, please refer to the Guideline on the Second Conduct Rule (in particular, paragraphs 5.3 to 5.7).
KowloonVend Ltd and New Vending Co are the only two companies that sell vending machines in Hong Kong. KowloonVend has the majority of vending machine sales, while New Vending, a recent entrant in the market, has a much smaller share. KowloonVend was selling its machines at a highly profitable price. When it entered the market, New Vending began selling its machines at a much lower price and KowloonVend’s market share began to decline. New Vending gained these lost sales from KowloonVend. In response, KowloonVend cut its prices in half. This low price is not enough to cover any measure of KowloonVend’s costs and KowloonVend loses money with each vending machine sold. New Vending cannot compete with these low prices and eventually goes out of business.
Assuming it can be established that KowloonVend has a substantial degree of market power, the Commission may assess KowloonVend’s conduct as predatory and a contravention of the Second Conduct Rule. The conduct might also be considered as having the object of harming competition.