The Rich Get Richer: Qualcomm’s Alleged Use of Predatory Pricing
In lecture, we’ve discussed scenarios that involve the rich-get-richer effect. The idea behind the rich-get-richer effect is that companies with very popular products have an advantage over companies with less popular products, regardless of the quality of competing products. This advantage can be exploited in a number of ways, one of which is known as predatory pricing. Predatory pricing is a practice in which one company will sell their product way below normal market price. Companies with products that have widespread usage across a population can drastically cut their prices and still make a profit because of the sheer number of people that use their product. They can change the price of their product to be so low that customers would be much better off using their product over the product of any other company. Smaller companies would find it difficult to match these prices because they do not have enough users of their product to still make a reasonable profit.
According to an online article by The Inquirer, Qualcomm, a semiconductor company, was recently accused of predatory pricing, and the European Commission is currently doing an investigation. The European Commission states that predatory pricing undermines the ability for companies to compete based on the quality of their products. They believe that competition based on product quality breeds innovation while predatory pricing is used only as a means for profit. If Qualcomm is indeed found guilty of predatory pricing, they could be fined up to $26.5 billion.
The rich-get-richer effect is an important part of understanding the behavior of markets, and, although some theoretical examples were touched upon in class, it is important to be aware of real word instances. Qualcomm’s exploitation of the rich-get-richer effect though predatory pricing was so powerful that the European Commission had to intervene in order to preserve the integrity of the market. This example is excellent at showcasing the significance of the rich-get-richer effect.