At the beginning of 2001, Peach Computers competed exclusively in the computer industry and generated approximately 96% of its revenue from the sales of computers and computer-related software and approximately 4% of its revenues were generated from sales of other peripherals. Further, of these revenues, 60% was from sales in the U.S., 30% was from sales in Europe, 7% was from sales in Asia and 3% was from other areas. In October 2001, Peach entered the personal electronics industry by introducing a new MP3 player known as the PeachPit. In developing and selling the PeachPit, Peach Computers was able to use many of the same R&D facilities, suppliers, production facilities, and distribution and sales outlets as the computers and software Peach Computers traditionally sold. By 2003, the PeachPit MP3 Player, accessories for the unit, and sales of songs on Peach Computers' NectarTunes website accounted for 35% of Peach Computers' revenues.
-If, when Peach Computers introduced its PeachPit in 2001, the company used its profits in the computer industry to subsidize its operations in the electronics industry and used this subsidy to sell the PeachPit for a price that was less than the cost of producing and selling the MP3 players, this would be an example of
A) mutual forbearance.
B) escalation of commitment.
C) predatory pricing.
D) multipoint competition.

Question

Quizplus · Accepted Answer

This scenario describes predatory pricing, which occurs when a company intentionally sets a price for a product lower than the cost of producing and selling it in order to drive competitors out of the market. By using profits from their computer sales to subsidize the MP3 player operations, Peach Computers was able to sell the PeachPit at a lower price than their competitors, making it difficult for them to compete.

At the Beginning of 2001, Peach Computers Competed Exclusively in the Computer