We’ve recently spent some time thinking about the issue of predatory pricing. The most important lesson learned thusfar is that it is virtually impossible to look at a pricing policy for a firm and ascertain whether it is truly predatory. You will learn in the future whether, even if this knowledge problem could be overcome, the existence of predatory pricing is reason for concern. For the purposes of this post, let’s assume that predatory pricing is common, observable and is a problem worthy of intervention.
What does this imply about the municipally run (often state mandated) recycling programs across the United States? From some very informal surveys of some major cities, we have begun to learn that very few cities even undertake a cost-benefit analysis of their programs. Some have acknowledged that the programs definitely lose money, others tell us that it depends on the prices of the recycled materials, so that at times the programs seem to generate positive net revenues and at other times they do not.
Recall that pricing is typically deemed “predatory” when the product is sold below cost. It is argued that this will hurt current competitors and future consumers. So, if recycling programs routinely do not charge prices consonant with the costs they incur would it not be the case that municipal recycling programs are being predatorily priced? Think about it. Cities get us all into the habit of recycling. They provide us with bins. They do not charge us any extra for the services. We are thus “lured” in to the consumption of this good through the low pricing policies. Then, once we are all hooked on recycling, then the “companies” can jack up the prices and take all of us consumers for a ride. Therefore we must call in the folks at the FTC and the DOJ to put a stop to this dastardly practice. And because municipalities offer these services for a zero marginal cost, it seems to put private recycling companies at a competitive disadvantage. So in cities with mandated recycling we have no or few private alternatives and when the recycling programs inevitably experience cost overruns, the “consumers” are hit with higher tax bills to pay for it. I guess that last part is the way out of the predatory pricing problem. You see, your taxes are not a “price” for the recycling. So, so long as you do not get higher “recycling” bills in the mail from your provider, you cannot possibly be gouged by them. If I were a corporation I’d try this. So, get into a price war today. Put all of your competitors out of business. But then, keep your prices low. However, charge all of your customers an annual “membership fee” for the right to do business with you. I am sure DOJ would nail us for that, but those rules don’t apply to the folks in the solid waste “business.”