Friday, September 23, 2016

Predatory pricing as part of a national security strategy

This kind of thing usually comes up in the context of Chinese national business practices, and most opponents of international trade bring this up when coming up with arguments to support their views.

The basic idea here is that a nation deliberately facilitates its companies as they pursue predatory pricing strategies to gain dominance on international trade patterns. For example, a nation subsidizes its companies and that subsidy allows them to drop prices on internationally traded products. The companies then basically dump their products on to the market and drive all other international competitors out of business. Once the dominance has been achieved, the nation raises taxes or withdraws incentives to these companies and in turn they price gouge their captive markets.

A lot of people accuse the Chinese of doing this kind of thing. And given how many people accuse the Chinese of doing this,  I feel that there is certainly some fire under all the smoke. I also agree that this is the kind of strategy that would appeal to Chinese national security planners.

There is however a problem. If you look carefully at all the control that has to be maintained to get this kind of scheme to work, you realize that such a strategy has significant administrative costs. And this administrative costs have to be born for several decades before price gouging can provide a real return. That is a period over which the Chinese (or any other nation  seeking such a policy goal) basically holds on to a very insecure debt burden which grows quite significantly. The biggest risks in such a strategy are that in the period that it takes to really action such a policy - no competitive technology appears that is better tuned to customer expectations of product quality.

Now people (like myself) who work on novel technologies will tell you it is very difficult for new technology to compete with lower cost mass produced stuff, but this is only really true when there is no clear value addition from the new product side. If your new product can actually offer users an improved UX or better appeal to customer defined norms, you can be competitive against a dumping strategy. This can obviously augmented by brand awareness and loyalty etc...

There is also a psychological factor at play in this sort of thing. If the target market can show even one example of a successful market disruption, then it will sow doubts in the minds of the policy planners in the nation attempting a dump-and-gouge strategy. I think some of this is happening in China, I see a lot of Chinese firms trying to do innovation - or at least their own version of it. These firms inevitably discover that innovation is painful and expensive and it further chews through their weak profit margins. They basically do not have a very deep resource pool from which to attempt true innovation and what it ends up doing is that it prolongs the time for which their government has to shoulder their bad debt.

Many people argue that closing the door to the target market is the only way to secure themselves from dump-and-gouge attacks. This kind of thing basically advocates against international trade which is the corner stone of our global prosperity.

I disagree with that way of doing things  - I think a better way is to engineer disruptions of the dump cycle through targeted innovation.  That should have a salutary effect on the dump-and-gouge strategy without affecting the overall framework of international trade.


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