Answer to Question #108924 in Microeconomics for Arianna

Question

Economists belonging to the Chicago School claim that low prices are always evidence
of competition, not predatory pricing. Explain why the assumption of perfect information is
important for their argument.

Answer 1

In a perfect competition market, buyers and sellers have access to information about the market. Buyers and sellers have full knowledge of prices and quantities of a commodity in the market. Therefore, low prices of a product in the market is as a result of fair competition in the market and it is also determined by demand and supply. Predatory pricing on the other hand is when a firm sets low prices for its products with the aim of eliminating other firms in the market. However, its low price of products does not reflect the general low market price of a commodity but it is only specific to the firm. Furthermore, predatory pricing is an illegal practice that cannot be used to generalize that prices of a commodity are low in a market.