Businesses are often accused of engaging in predatory pricing. However, competition regulators often have difficulties separating predatory pricing from vigorous competition. The Areeda–Turner test for predatory pricing states that if a firm sets its price above its marginal cost then it is probably not predatory pricing, but if it sets its price below marginal cost then it is probably predatory.

Remembering our analysis of profit-maximising firms from chapters 14 and 15, explain why pricing below marginal cost might be viewed as a deliberate attempt to drive out a competitor rather than vigorous competitive pricing. Can you think of any situations where a firm might set a price below marginal cost but not be predatory pricing?