Larry and Susan work in an office near Tractor-ama and Tip Top Tractors, wholesale tractor sellers on the same block. Larry notices that both places are charging only $1500 for a base-model tractor, which is below the price of $2000 that a base-model tractor typically costs elsewhere in the city. Susan wonders if Tractor-ama and Tip Top Tractors are engaged in a price war. Over the past month, she has noticed that each store has lowered its prices each week, but that Tip Top Tractors always lowered its price first. She suggests that Tip Top Tractors is engaging in predatory pricing. Larry correctly replies that they cannot determine whether Tip Top Tractors is guilty of predatory pricing because:

to prove Tip Top Tractors engaged in predatory pricing, you would need to prove that Tip Top Tractors priced a tractor below average variable cost with specified intention of driving Tractor-ama out of business.

Explanation:

Predatory pricing is a strategy to cut prices and set a price really low to gain new customers. This strategy is also used to stop entering other firms into business and create monopoly or Drive competitors out of their business. Tip Top Tractors has also adopted this strategy and has lowered the prices of tractor to $1500 which is below that the $2000 which is normal price in the city.  To prove that Tip Top Tractors has adopted predatory pricing, we require proof that the prices are set below average variable cost.