Greg Mankiw's blog directs us to one interesting article by the New York Times about how the American Booksellers Association is accusing Amazon, Wal-Mart. and Target of predatory pricing:
"In [a] letter [to the Justice Department] dated Thursday, the association argues that steep discounting on 10 hardcover titles by authors including John Grisham, Stephen King and Barbara Kingsolver “is damaging to the book industry and harmful to consumers."
Initially you would think that price competition is good for consumers--it brings down the price and so increases the welfare of the society as a whole. Not good for the losing companies though. If a firm can't take the heat, then that means they're not as efficient as the winning firms, and so society is better off that they're out of the market. In the end, everyone's happy--the remaining firms are efficient in producing goods, the consumers are satisfied with the low prices.
But then again, the problem comes in when winning firms are charging prices that would make them lose profits. Doing so, anyone can think that these firms are just charging this low just to push smaller competitors out of the market. When the dust is settled, and the firm with the lowest price is the one remaining, he can practice monopoly power and then charge higher prices. How can the consumers complain--only one firm is remaining and the firm can charge whatever it wants. And this is what you call predatory pricing.
This is what they meant when you start to question: "Hey prices are going lower and lower, and low prices are what consumers want. So how can they say this behavior is harmful to consumers?" The answer is, it may be good in the short term, but it's not in the longer term. And when that time comes when there's only a monopoly remaining, it may be hard for new entrants to come in because the monopoly might again revert back to its practice of predatory pricing to drive out the new player. So, better avoid that situation and let the government make a stand that such behavior will not be tolerated.
So in sum, it may be good for consumers to have a price war, but it is only up to the point where one firm or three will start doing some predatory pricing. And it can be easy to determine if indeed some firms are practicing predatory pricing--the burden is with the other firms to prove that the prices charged by winning firms are below profit levels. And I think the American Booksellers have established that already. It's exciting to look forward now to what will happen to Amazon, Wal-Mart, and Target in this case.