Unlimited hosts and cheap lying hosts - illegal?

Interesting story, guys. While studying today, I have uncovered an interesting legal article related to Predatory Pricing technique. In accounting, predatory pricing is the practice of setting prices below cost for the purpose of injuring competitors and eliminating competitors. In real life, we can see predatory pricing with hosting companies offering what they cannot potentially deliver - those who charge $1.95 for 50-75-100GB bandwidth packages.

It is important to note that pricing below cost is not necessarily predatory pricing (companies have been practicing in short-term during, for example, promotions). In Canada, however, Paragraph 34(1)(c) of the Competition Act deals directly:

"34(1) Every one engaged in a business who...
(c) engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have such an effect; is guilty of an indictable offense and is liable to imprisonment for two years."

A conviction under this paragraph is based on two conditions - prices must be unreasonably low, and such prices have the effect of reducing competition.

So, those hosts that offer the world for $1-2 (if you feel like their pricing might intentionally hurt your company as a competitor), theoretically speaking, can refer to this as a reminder their business might be illegal. At least in Canada. Not to mention that they will never be able to deliver massive resources at prices they offer - that's many more other legal offenses.

Best,

That's very interesting. Do you know if that applies to Canadian based businesses only, or are there similar laws in other countries?

Jordan, I only covered Canadian legal codes. I assume other countries have something in their Competition Acts.

Thats very intriguing. Maybe someone here at HD has more knowledge of US Enterprise laws that could find out whether the same applies to US based companies? Would be VERY interesting to find out...

Interesting ... but I think even in Canada it isn't as "black & white" as that quote seems to indicate. Unless that is something that has been added within the past 10 years (since I had to stop working).

Undercutting competitors pricing ... even to the point of selling products at a loss ... is (or at least was) a perfectly legitimate business "tool". It may not have been nice ... but it was perfectly legal.

That tactic has even been used to help a company become such a thorn in a large competitors side by targeting a larger competitors customers, that the larger company buys the smaller company and becomes willing to pay more than the smaller company is actually worth .... just to get rid of it.

Even large retail outlets regularly will sell a line of products at less than their cost. I know of a few "big box" outlets that have sold the same line or category of items at less than what I know their cost to be ... just to entice the customers into the store. Once they have the customer in the store to buy those products ... chances are the customer will purchase additional items the stores do make a profit on. Its considered "the cost of doing business".

The only instance where I have heard that pricing becomes an issue ... even if the company chooses to sell their products at a loss ... is if their intention is to become a "monopoly" or to gain sole control over the sale of a specific product or service in a specific jurisdiction or geographical area.

In Canada, if someone really wants to cause some of these web hosting companies some headaches ... I think it would be easier to target them using the "truth in advertising" requirements under Canadian Law. If I understand the specifics of those laws ... as long as a company is registered to do business in Canada or if the proceeds from the sale of products or services end up in a Canadian bank ... these companies are bound by Canada's "truth in advertising" laws. Even if their web servers are hosted in another country. Canadian web hosts advertising "unlimited" anything could be charged and/or fined under this law because it can be proven that there are always limits on any account.

Or these hosts that advertising HUGE bandwidths but in actuality their total bandwidth availability cannot meet the "sold" bandwidth to their customers ... they too "might" be subject to charges under this law. But I guess they could always argue they buy more bandwidth as the customers needs require. I think though that they would have to be able to prove that that is their practice.

Anyway, my thoughts may be all wrong in today's world. My education in Business & International Law is decades old and I have not been "in the business world" for 10 years. What I have shared here is based on the way things "were" (and I believe still are) and on knowledge gained via our legal department when I was still working and running a multi-million dollar company in Toronto that regularly went into "battle" with competitors (some larger some smaller) and "pricing" was always the "weapon of choice" for all concerned.

JMHO
Peter

From what I remember of my economics class back in High School (In the US) our teacher spoke of what Peter mentioned above. The company would have "Loss Leaders" for the sole purpose of getting customers into the store. It was legal, and is a very popular tactic.

The illegal part was when a company would claim they had product for sale, but didn't stock any, but said "We'll sell you this instead for $X more. It's better though!"

Well there is certainly a difference between a loss leader, and actually selling every item in the store at a loss.

I can't see where it would be more fitting to be illegal than in a long term service industry such as cellphone service, hosting, etc.

When you offer a service that people will use for long periods of time, but sell it all at a loss, you won't be in business very long. So you've reduced your client's long term service, to a much shorter service.

A loss leader, can be considered a promotion of sorts, but the mere idea of a loss leader is to lure the customer in to potentially buy product or service at full price.

Example:
"Free phone with purchase of 1 year of service agreement."

They lose money on the phone initially, but make it up with the money they gain from your one year of service.

"Free phone, plus free unlimited service forever" is not a loss leader.

There is definitely a difference between a loss leader and predatory pricing. The difference is pricing every item in the store below cost. Even supermarkets practice loss leader pricing routines, but on certain products when demand is declining or its not as high as forecasted. If they price everything below cost - its possible, but then it must be liquidation sale and the store will go out of business in the short-run.

So I would say the law mentioned above stays true to all those overselling their services.

I have found that this law stands true for the US, on a state by state basis as well.

Two sources:
http://www.stolaf.edu/people/becker/...s/sherman.html
Section 2

http://library.findlaw.com/2000/Feb/3/128712.html

These are also based on predatory pricing to drive out competition or "monopolizing"

Over-overselling you mean, for overselling is still an accepted (and needed) practice in some huge and vital industries. Trouble is, how do you define where over overselling starts?

Offering Unlimited Services should surely be a breach of the Tradings Standards / Description / Misleading Advertising legislature that is set-up in the UK.

But trying to prove that a company's intent is to become a monopoly is very hard to prove. Especially in an industry such as web hosting ... where competition is spread out over several dozen countries.

My personal thought on any web host that is offering space at pricing that cannot be matched (and still realize a profit) is ... the governments/law agencies should be keeping a careful eye on them because someone is probably embezzeling (sic??) the funds and are soon (the company & the person) about to suddenly disappear. And when they do ... their "suppliers" & their customers both are going to get burned.

Countries should be cracking down on these "fly by night" web hosts that give the legit web hosts a black eye. I believe Canada is now in the process of revamping its laws to incorporate the handling of internet fraud & embezzelment (again ... sic???). As they say ... better late than never

Peter

One thing to keep in mind that a lot of these companies using these tactics are far from legal companies to begin with.

Many of them are run by children, who decided to earn some instant wealth (they don't of course).

Many of them have not took the road of making their business legal, thus if not in violation of the Fair trade and competition act, would definately get nailed for taxes, etc.

I don't know how you would prove that fly-by-night 14year old owned/operated "Company A" falls into said category of attempting to monopolize the entire Web Hosting market:

Because while we know that their acts would not be profitable, we can't prove that they're doing it to obtain market dominance.

Edit: haha, Mark and I were on the same track with the age thing and so called Company - last post I saw was Peter's while I was reading the links that Mark had posted still. Just thought it was humorous.

The thing is, they wouldn't have to.

If their pricing is low, and their drive is to get rid of competition by marketing ALL of their services below cost.

Once reported, they wouldn't need to have proof of a potential monopoly to investigate. Once they investigate, and find that it's run illegally by way of registration, taxes, etc....that business is then breaking other federal laws.