Economics Oligopoly Questions Medium
The limit pricing strategy in oligopoly refers to a pricing strategy adopted by dominant firms in the market to deter potential entry of new competitors. It involves setting the price at a level that is low enough to make it unprofitable for new firms to enter the market, while still allowing the dominant firm to earn a reasonable profit.
The goal of the limit pricing strategy is to create a barrier to entry by signaling to potential entrants that they would face intense competition and low profitability if they were to enter the market. By setting a low price, the dominant firm aims to discourage new firms from entering and potentially eroding its market share and profits.
There are several ways in which the limit pricing strategy can be implemented. One common approach is to set the price just above the dominant firm's marginal cost, which allows the firm to earn a profit while making it difficult for new entrants to compete on price. Another approach is to engage in predatory pricing, where the dominant firm temporarily lowers its prices to drive out potential competitors and then raises them again once the competition is eliminated.
However, it is important to note that the limit pricing strategy is subject to legal and regulatory scrutiny. In many countries, predatory pricing is considered anti-competitive behavior and is prohibited by competition laws. Therefore, firms must be cautious in implementing this strategy to ensure compliance with the relevant legal framework.
Overall, the limit pricing strategy in oligopoly is a strategic pricing approach used by dominant firms to deter potential entry and maintain their market power. It involves setting prices at a level that makes it unattractive for new firms to enter the market, thereby preserving the dominant firm's position and profitability.