Predatory pricing can result in market failure by eliminating competition, fostering monopolies, and diminishing consumer choice.

Predatory pricing is a strategy employed by a dominant firm, wherein it sets prices exceptionally low—often below its costs—with the explicit goal of driving competitors out of the market. Once the competition is eliminated, the firm is free to increase its prices, frequently beyond previous levels. This approach can contribute to market failure in several significant ways.

Firstly, predatory pricing leads to a reduction in competition. In a perfectly competitive market, firms vie with one another on the basis of price and quality, ultimately benefiting consumers. However, when a firm resorts to predatory pricing, it can push rivals out of the market, resulting in the firm becoming the sole provider. This absence of competition can create inefficiencies, as the dominant firm lacks any incentive to enhance its products or services or to maintain low prices.

Secondly, predatory pricing can establish monopolies. Once a firm successfully drives its competitors from the market, it can raise prices without the risk of being undercut. This situation may result in consumers paying inflated prices for goods and services, and can stifle innovation, as the monopolistic firm has little motivation to improve its offerings.

Finally, predatory pricing can limit consumer choice. In a competitive marketplace, consumers enjoy a diverse array of products and services. However, if a firm engages in predatory pricing and eliminates its competitors, consumers are left with fewer options. This can force consumers to purchase products or services that do not align with their preferences or that fail to meet their needs.

In summary, predatory pricing can lead to market failure by eradicating competition, creating monopolies, and reducing consumer choice. These outcomes can result in higher prices for consumers, a stagnation in innovation, and a decline in the quality of products and services. Consequently, it is crucial for regulators to monitor market activities and take appropriate action to prevent predatory pricing practices.