Allegations of predatory pricing and supplier issues

What is Predatory Pricing?

Predatory pricing is a method of setting prices low in order to eliminate the competition.
Predatory pricing is illegal under anti-trust laws, as it makes markets more vulnerable to a
monopoly for a particular player. Companies may engage in a variety of activities that intend
to drive out competitors, such as create opposition to entry for new competitors or unethical
production methods to minimize costs.

Why is it illegal?

Nowadays as per the new anti-trust laws predatory pricing is considered anti-competitive in
many countries and is illegal under competition laws. However, it is nearly impossible to
prove that prices dropped because of deliberate predatory pricing rather than actual price
competition. In any case, it may be possible that competitors may be driven out of the market
before the case is ever heard.

In many countries there are legal boundaries and restrictions and upon using this pricing
strategy, which may be deemed anti-competitive. It may not be technically illegal, but have
severe restrictions.

Wal-Mart and Predatory Pricing

Issue-1

In September, Wal-Mart was hit with three separate charges of predatory pricing.
Government officials in Wisconsin and Germany accused the retailer of pricing goods below
cost in order to drive competitors out of the market. In Oklahoma, Wal-Mart faced a private
lawsuit alleging similar practices.

The Wisconsin Department of Agriculture, Trade and Consumer Protection filed a complaint
accusing the retailer of violating the states antitrust law. The complaint states that Wal-Mart
sold butter, milk, laundry detergent, and many other staple goods below cost in stores in
Beloit, Oshkosh, Racine, Tomah, and West Bend. The company intended to force other
stores out of business, to gain a monopoly in local markets, and ultimately recoup its losses
through higher prices in later time.
State officials filed the complaint after Wal-Mart failed to justify and take corrective action
even after following several warning letters sent as early as 1993. The administrative law
judge to review the charges and recommend further action to this to the departments
secretary. The complaint carries a total of 352 violations, each of which could incur a fine of
$500.

Issue-2

In Germany, Wal-Mart was charged with similar predatory pricing tactics. The federal Cartel
Office accused Wal-Mart of selling goods below cost and ordered the companies to raise
prices immediately. Wal-Mart could face fines of DM1 million ($434,000) if it fails to comply.

German law prohibits predatory pricing, because of its impact on small businesses. In this
case, authorities feared a price war among the countrys three largest food retailers would
decimate small small shops, ultimately leaving consumers with fewer options and higher
prices. The material benefit [of below cost pricing] to consumers is marginal and temporary,
but the restriction of competition by placing unfair obstacles before medium-sized retailers is
clear and lasting, said the Cartel Office.

Walmarts Stringent rules with Suppliers

Issue-3

Wal-Mart has tightened its delivery windows for suppliers and will impose fine on the
suppliers for delayed or early deliveries. Wal-Mart will impose a 3% penalty, based on cost
of goods, if a supplier shipment arrives at a regional distribution centre outside of a
prescribed four day delivery window, either early or late.
The notion of delivery penalties is not new in retail but the fact that Wal-Mart has now
tightened the window has a lot of connotation for many suppliers to retail. As Wal-Mart
goes, so does the rest of the industry. The main reason behind this strategy is driven by
Wal-Marts desire to continue to decrease its own inventory levels, transferring that burden
to suppliers.
Ethical Issues Found and analysed:

The issues discussed here are corporate issues related to the pricing policies and service
level agreements of Walmart with their suppliers.

Since the corporate governance of Walmart is highly competitive in nature which doesnt
focus long term sustainable market growth but rather creates unhealthy competitive
environment.

The same is true is with supplier contracts. The rules imposed in service level agreements
were quite stringent and they were created on the monopolistic nature of the supermarket
giant and the cost benefit analysis for the suppliers is not feasible with regards to the amount
of labour and capital investment provided by them.

According to the First version of Kants categorical Imperative, Walmart should think in a
way that what if someone, some other supermarket giant does the same with them, then are
they in a position to face the repercussions? So the answer is going to be a big NO. So in
my opinion, the predatory pricing is harmful in long run, instead the firm should focus more of
customer satisfaction by providing them after sales incentives and other schemes which will
not affect the pricing and market scenario for the other competitors.

As per the second version of Kants categorical imperative, people should never use
other people only as a means to their ends, but always treat them as they freely and
rationally consent to be treated and help them pursue their freely and rationally chosen ends.

The same applies for suppliers of Walmart. Just because Walmart has a brand name and
suppliers are getting benefited by associated themselves with such a big brand doesnt
mean Walmart should exploit the suppliers by posing stringent rules and regulations. They
should not use suppliers fear of losing business for their own benefit. Instead they should
collaborate and build a strong sustainable business relation with their suppliers.

Here the Utilitarianism Principle also comes into picture, here Walmart is able to provide
relatively low prices at the expense of harming other brick and mortar stores business. So
this is not sustainable in the long term since it is going to create unhealthy competition
environment which will eventually lead to monopoly.

Monopolies are harmful for the customer satisfaction and should be avoided at any cost.