Managerial Economics 2nd Edition by William Boyes

Exercise 6

Wal-Mart Predatory Pricing Case
At issue was whether Wal-Mart, which had built the nation's largest retail chain with its everyday-low-price strategy, went beyond the legally recognized retail practice of promotional pricing and intended to destroy its competition. A 1993 lawsuit filed against Wal-Mart by a group of independent pharmacies argued that Wal-Mart used predatory pricing. The Arkansas statutes, which were being tested for the first time since passage in 1937, generally forbade businesses from selling or advertising "any article or product … at less than the cost to the vendor … for the purpose of injuring competitors and destroying competition."
Wal-Mart's attorneys argued in a pretrial brief that what the law described as a "product" shouldn't be considered to apply to individual items, but rather to Wal-Mart's "market basket" or full line of products. If the entire line isn't priced below cost, they contended it wasn't a violation of the statute.
It is obvious that in order to determine a state violation on "predatory pricing," the court must determine what principle it would accept as "nonpredatory" in pricing below cost. This is indeed a gray area. The second element to be considered under state laws is whether there was an "intent" to injure competition and whether in fact the result of such malice was to injure the competition. The third element was "recoupment." Were the prices ultimately raised, once the competition was put out of business?
What is predatory pricing?