Software Predatory Pricing and Competition Law - Assessing Below-Cost Prices

Abstract:     
Below-cost pricing may elicit lawyers to contemplate market power, market barriers and predatory pricing, all of which constitute routine thinking on abusive pricing. This paper observed that below-cost pricing occurs in the software market under traditional circumstances and found that, as is typical with a new economy, the software market exposes different factors that are not evident in the markets on which traditional predatory pricing theory was based. These factors, such as extremely high switch/entry barriers and negligible marginal costs, result in pricing practices that are significantly different from those in traditional markets. A below-cost price, which traditionally would be considered predatory, may be necessary in the software market. Thus, in this context, a below-cost price would not be considered abusive but would rather be considered (almost) efficient. On the basis of these observations, this paper concludes that predatory pricing frequently occurs in software markets and that PP in software markets should be regulated by competition rules. At the same time, although efficiency-enhanced below-cost pricing occurs often, it is different from predatory pricing. Finally, this paper analyses the occurrence of predatory pricing and offers an approach for analysing predatory pricing as it relates to the software market.

Keywords: software, predatory pricing, dominant position abuse, below-cost prices

JEL Classification: K21, L11, L86, O31

Accepted Paper Series