Product Characteristics and the Effectiveness of Dow's Countermeasure for Predatory Pricing

Jason E. Taylor, Mona Moldoveanu and Jerry L. Taylor

International Journal of the Economics of Business, 2013, vol. 20, issue 1, 1-14

Abstract: Predatory pricing theoretically occurs when a firm cuts its price below cost with the intention of driving competitors out of the market so that the predatory firm can then act as a monopolist. Herbert H. Dow, founder of the Dow Chemical Company, saw his company face such a predator, the German Bromkonvention, in the American market for bromine in the early 20-super-th century. Dow responded with an ingenious gambit -- he secretly purchased the low cost German bromine and then repackaged and resold it on the European market at a profit. This case has been offered as evidence that predatory pricing is unlikely to exist in the real world, since the prey can simply do what Dow did. This paper explores the product and market attributes that must be present in order for the Dow Gambit, or variations of it, to be used as a successful countermeasure for predatory pricing. We examine product and market attributes in 15 other well-known cases of predatory pricing to gain some empirical insight. In only two of these were the product and market characteristics as favorable for the prey to employ the Dow Gambit as they were toward Dow himself. We conclude that the Dow Gambit can only be employed in a narrow set of circumstances

Date: 2013
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DOI: 10.1080/13571516.2012.750043

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