Is Predatory Pricing Impossible? – How Mr. Dow Outsmarted the Monopolists

The story of Herbert Dow, the founder of the Dow Chemical Company, provides a wonderful case study against the efficacy of “predatory pricing” in the free market. In the early 20th century, Mr. Dow used the free market – not some state regulatory agency – to outsmart the Bromkonvention, a price-cutting cartel of 30 German chemical companies.

The case centers on the chemical bromine, which was used to produce film and used as a sedative. The German cartel set the global price at 49 cents a pound. American companies, including Dow Chemical, sold bromine for only 36 cents. The cartel told them to stay in the American market; Dow took his bromine abroad in 1904.

The Bromkonvention attempted predatory pricing to drive Dow out of the market. It started selling bromine in the American market at 15 cents a pound, taking a loss at the extraordinarily low price. Dow simply purchased hundreds of thousands of pounds at 15 cents and sold them back to Germany and England for 27 cents – a nearly 100% profit. The Germans couldn’t figure out why American demand was so high; they further cut the price down to 10.5 cents a pound, simply increasing Dow’s already incredible margins.

Dow later challenged the Germans in many other markets during the WWI era. He produced indigo, aspirin, Novocain and phenol, which was used to make explosives during the war.

Dow’s bromine war shows the free-market solution to the problem of predatory pricing posed by cartels at home and abroad. Those who huddle together and agree on artificially high prices are by definition the lazier and stupider of the companies; they are running away from work and intelligence. The way to break them up is to outsmart them and laugh at them.

Share Button

RSS feed for comments on this post. TrackBack URI

Leave a Reply