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Predatory
Pricing collapses in practice, though it is a good theoretical concept By 1904, Herbert Dow Was Selling Bromine for 36 Cents a Pound The world price, set by a German cartel of about thirty firms
called Die Deutsche Bromkonvention, was 49 cents. Dow had carved out the
American market by undercutting them at home and staying out of Europe by
tacit agreement. Then He Decided the World Was Open Territory Dow began shipping bromine to England and Japan. The
Bromkonvention dispatched a representative with an ultimatum: stop exporting,
or be destroyed. Dow refused.
The Cartel Declared a Price War In early 1905 the Germans flooded the American market with
bromine at 15 cents a pound, far below what Dow had been charging at home. The
strategy was textbook predatory pricing: dump until Dow ran out of cash, buy
whatever was left, restore the cartel price.
Dow Did Not Cut His Prices. He Vanished from the American
Market.
He pulled Dow Chemical bromine off American shelves entirely
and shifted his whole production to Europe and Asia. Then he sent a buyer
into New York to pick up the German bromine the cartel was dumping, hundreds
of thousands of pounds of it.
The Cartel Was Funding His Expansion Dow repackaged the cheap German bromine and shipped it back
across the Atlantic. He sold it in Europe at 27 cents a pound, including
inside Germany itself.
The Germans Kept Cutting Baffled by American demand that would not die, the
Bromkonvention dropped its US dumping price to 12 cents, then 10.5 cents.
Each cut widened Dow's resale margin in Europe. Dow wrote to a colleague,
"We are absolute dictators of the situation." The Cartel Surrendered in 1908 After four years the Bromkonvention came to terms. The Germans would stay out of the United States. Dow would stay out of Germany. The rest of the world was open. Dow Chemical emerged from the price war with international distribution it could never have built on its own.
In 1958 the economist John McGee published "Predatory
Price Cutting: The Standard Oil (N.J.) Case" in the Journal of Law and
Economics. His argument was simple. The predator always loses more money than
the prey, because the dominant firm has the larger market share to subsidize
at the loss-making price. Bankrupt the target and his factory still stands
for a new operator to buy cheap. The cartel pays the war's costs and inherits
none of the spoils.
The Lesson Dow Wrote on a Shipping Manifest- A cheap good is a gift to anyone clever enough to take it, and
the market always contains someone clever enough. Herbert Dow proved this in
1905, fifty years before the economic literature caught up. Predatory pricing
looks terrifying on paper and collapses in practice, because the predator's
weapon becomes the prey's supply line.
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