Predatory pricing = deliberately setting artificially low prices to drive competitors out of business
But suppose that someone’s motive is charity, not profit - does that change things? (Say a billionaire sees how affordable housing is virtually impossible to come by in San Francisco and decides to build 50,000 new homes and rent them out at super-low prices in order to drive down overall housing/rent prices in the whole region - is that legal?)
I have a feeling that this has been discussed before on this forum, but I can’t find the thread so…
The challenge for the developer would be getting permission to build 50,000 new homes in the first place - existing home owners would not want to see the value of their properties diminished and activists would be concerned about things like traffic and burden on public services. (Of course the homeowners would couch their arguments in terms of traffic, etc. )
But once the homes were built, I think your developer would be able to charge below market rates. Nonprofit organizations do this and seem to legally in the clear.
Last year you asked a similar question.
I think the reason it’s illegal is because if companies are successful, that lends to monopolies being established. The point is that one company is basically pricing things so low that there aren’t competitors at that price, and (I assume) are doing so in a way that is injurious to themselves as well.
I mean, it would be absurd to require a company to charge more just because some other companies can’t compete, assuming the first company is making a profit. But if one company is losing money by predatorily pricing, and just happens to have more cash reserves than the others, that’s what the laws are intended to prevent.
I’d think in your situation, the billionaire would be doing EXACTLY what the laws are intended to prevent, and would probably get penalized.
Facepalm :smack:
You are getting a taste of just how bad my memory is.
If he’s doing it as part of a profit-making business, yes, because the typical goal would be to drive the competition out of business and then raise your prices. Which is why when a billionaire wants to do something charitable without a profit motive, they form a non-profit, which can do things for profit organizations can’t - like take a loss on every apartment every month. (although the permission to build 50,000 or even 10,000 homes will not be forthcoming)
Is it?
I thought the next necessary step was “…then once those companies are out of business, I jack up my prices and make millions, bwahahahaha.”
I always thought that if I had Jeff Bezos money I could buy exclusive all white country clubs in the south and admit homeless blacks as members just to screw with them. Or move poor people into rich neighborhoods while I watched on my CCTV while Jethro pissed in his front yard in front of neighbor Thurston Howell.
IOW, I thought it a necessary element to prove that I am putting forth these loss leaders and bleeding cash in order to form a future monopoly. Antitrust isn’t my thing so I could be wrong. I didn’t think that buying property and doing legal things with that property was illegal.
The issue with predatory pricing isn’t whether you’re trying to create an unprofitable market, it’s whether you’re trying to drive your competitors out of the market. Changing your example slightly, suppose your billionaire estimated that the market for micro-studio apartments in San Francisco was 50,000 units, and that demand was largely being met, but at prices that he considered to be unfairly high. He then chooses to build 50,000 micro-studio apartments and lease them out at a price that is below where he can make a profit on the units. That’s anti-competitive and it doesn’t really matter what his motivation is. The fact that he’s using his wealth to drive his competitors out of the market and incurring losses to do so is what makes him in violation of anti-trust laws.
Change the scenario and suppose that the billionaire estimated that the market for micro-studio apartments in San Francisco was 100,000 units, but only 50,000 were available. He makes the same decision to build 50,000 units and charge the same rental price. His competitors can gripe that he’s using his wealth to put pricing pressure on them and that they are now second choice suppliers. However, the fact that there is still a market for the existing units means that he’s not being anti-competitive. The billionaire isn’t being competitive in the usual sense of trying to optimise profit, but that’s not the standard that anti-trust laws require.
Another problem is “flooding the market”. You can do predatory pricing with burgers or razor blades - but the problem with flooding the market with homes is - where’s the follow-on business? Homes are not consumed. If the activity results in fulfilling the home-owning aspirations of a generation in that market, where’s the follow up sales? To my mind, the risk is also that those with money will buy on spec and raise the prise on resell - plus you have the standard home owners who are willing to undercut future monopoly pricing since they bought low. Nobody re-sells old burgers or razors.
So if Bezogates sells 50,000 units and stops, then any future units built by anyone will sell at the cost of production - which we establish as higher, given the additional cost of scarce land in the metro area. So such a move would eliminate a scarcity bubble (temporarily) but not offset the real cost of production. As others have pointed out, much of the scarcity bubble is due to red tape trying to quickly get new units built in the first place - good luck with those permits for 50,000.
What about the opposite? Whereby communities pass slow or no growth bills that limit the number of new housing units developed in a single year to be less then 1% of the existing residential dwelling population. This is done under the guise of reducing congestion and traffic, but the real reason is to drive up home values and limit the accessibility of affordable housing for low income residents, thus driving them out.
The point isn’t so much the profit-making aspect or not, but rather the intention is to eliminate competition.
Which is EXACTLY what the hypothetical billionaire would be doing here- trying to drive the other landlords out of business by pricing well below market rate.
I suppose you could make the argument that the billionaire would be setting his rents such that any landlord in the city could make a tidy profit at that rent… in any building, for any unit, and that he’s just trying to manage the price per sq. foot for rental property to a more “reasonable” rate.
But who wants some super-rich guy deciding that for you? I certainly wouldn’t like it- who gave that asshole the power to decide what my land is worth? Or what I could rent it out for? None of his fucking business. At least the government has legitimacy, unlike some random billionaire.
I’m pretty sure there have been lawsuits challenging this sort of thing, and trying to compel communities to allow more affordable housing.
Suppose he didn’t build new units but instead purchased a significant percentage of existing units, then operated those units at break-even. Assuming there’s a large difference between break-even and market pricing(would there be?), how would that work out? I’ll also assume our investor isn’t trying to recoup the capital invested in the property, just operations, maintance and maybe improvement costs.
One issue is that our hypothetical builder is planning to build 50,000 units and stop. Once those units are sold, the real estate market is business as usual - and usual accounts for the price of land and building. Indeed, location location location is the price driver, and using up 50,000 available lots will most likely drive the price up not down for future lots, and thus the price of all houses, new and used. Indeed, the buyers of his cheap houses can flip for a tidy profit provided they don’t glut the market. Ditto for trying to buy 50,000 units. What happens when Joe the Wall Street Plumber decides to buy 10% of a company’s shares? Th market notices and the price in fact goes up.
One complaint in Vancouver, for a while, was that people were buying expensive houses - then tearing them down to build a monster house. The land was the price driver - cost of building is not much worse than anywhere, just have to deal with tradesmen facing higher cost of living than in Saskatoon. Manhattan is an island, Vancouver is a peninsula; both have no extra land except in distant hard-to-reach suburbs, so it’s more people chasing a limited supply. (In Manhattan’s case it’s Wall Street money, in Vcouver’s it’s Far East money looking for a secure landing spot)
I know, many years ago, Toronto offered cheap condos in some project to those of limited income. A college student friend of mine said his rich dad had told him and his brother to apply; as a student working part time, he would qualify under the poorly-crafted rules and daddy would front him the down payment. From such altruism comes opportunistic flipping. Plus, those desperate to sell who bought high cannot lower their prices, those who bought low will see that once all the 50,000 are gone they can raise their price to the good old times level.
So I would suggest while the event would cause a momentary dip in house prices, the government would have a hard time proving predatory pricing because there would be no follow-up attempt at monopoly; it’s as if a fleet of food trucks came into town offering 10-cent burgers, then left after a month.
A lot of times, there are restrictions on the resale price for houses sold below market price, so the owners can’t just flip the house for a fat profit.
I’m neither a lawyer, nor an anti-trust expert, so take my suppositions with a grain of salt. My belief is that if the billionaire was purchasing existing units to offer at lower rent, that unless it had a demand effect on the pre-acquisition rental market, it wouldn’t be an anti-trust violation. In general, by ignoring the financing costs of the property acquisitions, and not trying to make a profit against operational costs, the billionaire would probably be found guilty of anti-trust regulations if his actions bankrupted his competitors. However, there has to be evidence that the billionaire is trying to unfairly drive his competitors out of the market. Diminishing a competitor’s profit margins isn’t an anti-trust act. Buying out your competitors is a borderline predatory practice, but paying someone to leave a market isn’t, despite the intellectual dissonance, anti-competitive. Absent coercion, courts don’t have a role in determining the price of a sellable asset. There’s nothing wrong with the purchase of an asset in a market you have an interest in, nor competitive pricing within that market.
Basically, if the billionaire purchased half of the available affordable housing, and charged lower rent, but his actions had no extraordinary effect on the other half of the market, he would be in the clear. There would certainly be pricing pressure and diminished opportunity for his competitors, but that shouldn’t be an issue to bring before the court. If the half of the affordable housing market not owned by the billionaire has a market available to them, even if it’s been reduced, then anti-trust laws don’t apply.