CyberTech Rambler

June 24, 2006

Predatory pricing

Filed under: Uncategorized — ctrambler @ 3:19 pm

Well, it is kind of expected. Register is running a news story on Microsoft being accused of predatory pricing on Security Software.

I am wondering who actually have the upperhand on predatory pricing, Open Source or Microsoft. I think for this case, open source wins hands down. Pricing ALL your products at zero is predatory to the extreme. [Yes I know I can go further by paying customers to use my software but zero is normally the rock bottom.]

The accuser is SunBelt Software. While it is not someone who normally criticise Microsoft, as a Microsoft Gold Level Partner, it must had thought long and hard before making such a comment. It is not an disinterested party. Predatory pricing from competitors do hurts them. 

Hence, is predatory pricing really that bad? After all, it drives others out-of-business, reduces the incentives to innovate, and in this case, can force us to depend on the same vendor for normal software and security software. These are not my words, but Sunbelt's. And if so, how can I argue that predatory pricing by open source is good, while predatory pricing by close source is bad? Aren't I a hypocrate to argue this.

To answer this question, lets take a leaf from the goal of antitrust legislation. The danger in predatory pricing is the "distortion of market". I read this as "disadvantaging the consumers". Importantly, it is not about protection of competitors. Arguing for the protection of competitors, without showing how it seriously disavantage the customers, will not fly with me. 

Predatory pricing by everyone, open or close source, runs a very serious risk of discouraging innovation. Monetary reward gets lowered as the premium paid by customers for software drops. Let's face it, money is one big incentives for innovation. The difference between open and close source is the level of the "remaining" participation after predatory pricing campaign runs to its logical conclusion. In open source, what remains is a group of diehard people who are really interested in the field and where money is not the main motivator. With close source, you end up with one company . In this case, it does not matter whether you are open source or close source coz there is always one party that have monopolistic power. In both cases, barrier to entry for new comers are high and the level of continuous innovation in the field just sapped until one fine day where one organization or person breaks out of this dull state of affair. Invariably,this is achieve by a disruptive innovator in that field. This innovator restore market balance, reinject interest into the field and hurray, distortion of market disappear. 

As I see it, whether predatory pricing is bad or not depends on what happen in the dull state of affair, i.e., from the moment predatory pricing achieve its logical conclusion, to the time the disruptive innovation restore the market health. In particular, I am looking it from the customers point of view.  Remember that I argues that there will a party (may it be a group of people or a company) holding monopolistic power in this dull state, the question now boils down to the use (and abuse) of this monopolistic power. Both open source and close source will react to competition in negative way. It is the reaction that we have to watch. We needs to ensure that they do not abuse their dominant position. There is no doubt that with closed source monopoly, the chances of abuse is argueably higher because of the involvement of fancy pricing mechanism that an open source monopoly cannot use since open source predatory behaviour is to set the price at zero. The possible abuse by closed source monopoly includes unjustifiable premium (monopoly rent) paid to the monopolistic power and another round of predatory pricing, priced simply to edge out competition while maintaining the monopoly rent.  These behaviours, and others, severely disadvantage the consumers. This is one form of abuse which regulators have to curb.

The results of predatory pricing can be bad. For innovation, it can mean a lull in innovation. For consumers, it reduces choice. On the other hand, simply as a result of predatory pricing, the industry is forced to trim away excess fat to cope with predatory pricing by one of its members. Furthermore, there is no guarantee that this strategy will reach its logical conclusion. If it does not, the introspection introduce by predatory pricing might actually results in a healthier industry.

One final question, should the authorities intervine in predatory pricing situation? Besides the difficulty in defining what "predatory pricing" really is, the ultimate question is, how does the consumers suffer/benefit from prediatory pricing? Authorities should let the market sort itself out during the fight, but intervene only when it can be shown that consumers is going to suffer, not after consumers suffers from predatory pricing.

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