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Of course, this is only one indicator of predatory pricing, and all of the relevant evidence must be
considered. It is also appropriate to note that there should be a pattern of sustained pricing below
variable cost. Prices that are slashed only sporadically or occasionally are probably legitimate business
tactics, such as loss-leader pricing to attract customers or clearance sales to get rid of obsolete goods.
Predatory pricing is an important topic and has been the subject of major lawsuits in a wide variety
of industries. Because it is a common test for predatory pricing, variable cost is also a very important
topic that all successful businesspeople will benefit from thoroughly understanding.
Predatory pricing is usually thought of in a regional sense, or perhaps on a national scale. But it can
also occur on an international basis. In that case, it is known as dumping.
Dumping
If a foreign company is the predator, there is no inherent difference in the tactics or the goal of
predatory pricing. Pricing below variable cost would still remain a valid test. However, U.S. law
imposes a stricter test on foreign than on domestic companies. The legal test for dumping does not
involve variable cost. Rather, it focuses on whether the foreign company is selling its product here at a
price less than the price in its home market.
Dumping is simply predatory pricing by a foreign company. So the logic that supported using
variable cost as a test for predatory pricing would also support using the same test for dumping. But
the test actually used is the domestic selling price (usually higher than variable cost). This test makes
it easier to prove dumping than to prove predatory pricing. It favors the domestic firms and is harder
on the foreign company. This may be a matter of politics as well as one of economics.
Perhaps the best-known cases of dumping have involved the textile and steel industries. Another
recent case of dumping concerned Japanese auto companies accused by U.S. competitors of dumping
minivans in this country. Also, the Japanese makers of flat screens for laptop computers (active matrix
liquid crystal displays) were alleged to have sold their products in the United States at prices below
those in the home market.
It is not always easy to ascertain the home market selling price. Even if there are list prices or
catalog prices in the home market, there may be discounts or rebates that are difficult to detect.
Therefore, instead of using the home market selling price as the test, the production cost may be used.
This is reasonable, because the production cost is likely to be below the home market selling price.
Therefore a dumping price below production cost is virtually certain to also be below the home market
selling price. But production cost includes both fixed and variable costs and is therefore above
variable cost. Also, it may be arguable as to what should be included in production cost. For example,
some may include interest expense on money borrowed to purchase manufacturing material
inventories. Others may believe that interest is not part of production cost.