Jeff, if somebody gives you a gift, do you return it and scold them
for this horribly immoral and anti-competitive act?
> Doesn't this
> leads to a situation where, in order to compete in the short run,
> other companies are forced to do the same or lose customers?
If my competitor is selling at a loss, I need to maintain enough of a
presence in the market that people don't forget about me; and I need
to keep up my *capacity* for production. But it's an excellent time
to improve my *quality* and my *cost effectiveness*, because if some
of that capacity is temporarily shut down for renovation it's no big
problem: I *expect* my sales to temporarily drop.
When my now-weaker competitor ceases to sell at a loss, I will be
able to sell superior product (as compared to my own previous
product) at a lower price (as compared to my own previous price),
while keeping a larger profit margin. This puts me in an excellent
position to not only regain my former market share, but to take away
market share from the company that voluntarily weakened itself.
The only question is: do I have the reserves to survive the slow
period -- or, failing that, can I convince bankers and venture
capitalists to provide those reserves? Most likely this will be a
*lot* easier if I can convince them that my competitor is indeed
selling at a loss.
> Wouldn't that just mean that the company with the most money to burn
> at the start of this cycle will probably last longest? And after the
> other competitors starve, the consumers are left with fewer choices
> in the long run.
The long run is precisely why this sort of predatory pricing doesn't
work.
Suppose that a company manages, by selling at a loss, to become a
monopoly (it has never happened, but let's suppose). This is only
beneficial if it can make up that loss through later extraordinary
profits -- which creates a prime opportunity for some upstart to
invade that market, breaking the monopoly. And the "upstart" need
only be an upstart in that particular industry -- it could be a truly
huge pre-existing company in some other industry.
> And that sucks - monocultures are prone to atrophy
> and catastrophic failure.
Fortunately, they don't survive without government intervention to
prevent capitalism.
> Most "Americans" get all bent out of shape when businesses of
> another state (like Japan) try this trick on "us". Why should we
> allow it within our own market system?
The better question is, why should we get all bent out of shape when
another country does it?
Let's take a look at what Japan actually managed to do to the US, and
for itself, by one of these alleged tricks.
Reportedly, Japan was selling RAM at a loss, government subsidized,
in order to take over the semiconductor business. And you read
reports that Japan managed to force all US companies out of the
commodity RAM business.
The truth is that Japan has yet to surpass the United States in terms
of total RAM capacity produced. IBM's US production for its own use
has always been more by itself than any two Japanese manufacturers'
total output.
What Japan forced a bunch of US companies to do, was to stop
producing RAM for the wholesale market. But those companies did not
shut down their production facilities -- they diverted the facilities
to more valuable processes, increasing their profitability.
Japan lost a bunch of money in this effort, and then discovered a
few problems with their plan: (1) knowing how to make RAM chips with
the old technology didn't help much on creating or using new
technology; (2) the US companies hadn't been making much money on RAM
chips anyway; (3) Korea and other countries with low labor costs
(which Japan doesn't have any more) could make a *profit* selling RAM
at the same price Japan was selling it at; (4) the core of the
industry is the brains of chip design, not the fab plants; (5) new
technology let US companies profitably re-enter the wholesale RAM
business at Japan's sell-at-a-loss prices.
Remember that when Japan started this effort, RAM was selling at
hundreds of dollars per megabyte, wholesale. Today it sells at
dollars per megabyte, retail.
The damage done by Japan's exploitation of its monopoly is less than
obvious...
>
> I'm not for excessive gubbamint regulation, but likewise, I wouldn't
> be in favor of any completely unregulated market scheme which didn't
> serve the ultimate interests of *individual humans* (ie consumers
> and business people, not just the few richest businesses). I believe
> that the goal of any market system should be to get the maximum
> sustainable level of individual economic freedom and power for
> *humans*, not corporations.
Hm... start by eliminating the government interference in the free
market that makes "corporations" possible...
> I'd love to have you describe a method for avoiding this type of
> positive feedback trap without any type of regulatory intervention,
> and change my mind.
See above...
>
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