Below-Cost Sales and the Buying of Market Share

Abstract

A preoccupation with current profits can be a devastating weakness when competing with a market-share preoccupied competitor.1 Imagine a company-call it X Corp.-a medium-sized, privatelyheld U.S.-based corporation that earns almost all of its revenues from the sale of a single product. Unfortunately, for over a decade X Corp. has been losing market share to Y Corp., a large, foreign-based conglomerate. Although the division of Y Corp. that makes the product uses the same manufacturing technology as X Corp., Y Corp. sells the product in U.S. and third-country markets at a price far below its own production cost, as well as X Corp.'s production cost. A combination of factors enables Y Corp. to sell at this low price: government subsidies; market power in its protected home market; and profits from other Y Corp. divisions. X Corp. executives doubt that Y Corp. has ever made a profit on sales of the product in over a decade of production. Still, Y Corp.'s below-cost pricing is devastating X Corp., whose share of the world market for the product has fallen rapidly. This note will focus on the practice of Y Corp.-the buying of market share. Part I of this note will explore a number of practices that result in the buying of market share, distinguish them from ordinary price discrimination and show that although the buying of market share may benefit consumers in the low-price geographic market, it displaces efficient producers. The buying of market share also eliminates gains from trade, and results in a supra-national misallocation of resources. Part II will review both government-supported and privately-financed buying of market share and how U.S. antitrust and trade laws may ad* Third-year student, Stanford Law School. Thanks to John H. Barton, PhilipJ. Curtis,