Researchers at Syracuse University's Martin J. Whitman School of Management have found a new reason for firms to price below cost and it's not to undercut the competition. Turns out exchange rates and currency fluctuations may actually cause a corporation to price below cost to ensure consistent profit margins across a global supply chain. The study, "Technical Note: Pricing below cost under exchange-rate risk," has great implications for the interpretation of U.S. and international trade laws because it introduces another possibility of pricing below cost without showing malicious intent.
"So-called 'predatory pricing' and 'dumping' in international trade is prohibited by laws (Sherman Act and Article VI.1.b.(ii) of the GATT agreement, respectively)," said Burak Kazaz, The Steven R. Becker Professor of Supply Chain Management, The Laura J. and L. Douglas Meredith Professor of Teaching Excellence and the Executive Director of the H.H. Franklin Center for Supply Chain Management, co-author of the study. "This is due to the belief that companies that do it are motivated to hurt their competition. But we find that there is another reason for global firms to price their products and services more aggressively, and even below expected marginal costs, without intending to materially hurt competition."
John Park, visiting professor of supply chain management at the Whitman School and co-author of the study, added that court cases could be influenced by the findings, as the interpretation of these anti-trust laws changes. "There is a positive reason why rational and profit-minded firms might price below cost and therefore not all pricing below cases should be considered as illegal business practices," he said.
The report can be accessed at: http://whitman.syr.edu/faculty-and-research/research/pdfs/Park-Kazaz-Webster-POM-2016.pdf
Materials provided by Whitman School of Management at Syracuse University. Note: Content may be edited for style and length.
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