Limit pricing to reduce contestability:
, Limit pricing to reduce contestability:
Limit Pricing is a pricing strategy used by
oligopolies and it is when a firm decreases their
price to reduce the contestability of their market
and keep their long run market share.
Contestability is the threat that a firm faces when a
potential entrant joins a market. When a firm uses
a limit pricing strategy, it reduces the contestability
as prices are now lower for a business with good
branding. This means that the barriers to entry are
higher as it will be harder for potential centrals to
match the lower price when joining the market
because they don't from economies of scale. This
means that the existing firm in the market will
benefit from this because they will continue to keep their market share rather than it being split
across new firms. On the diagram, the revenue curve shifts from R to R1 because of limit
pricing, as they charge lower to gain a higher contestability. Therefore they currently wont make
a profit or loss as they are breaking even. Therefore quantity will increase from Q to Q1 as with
a lower price, demand of the good/service will increase.
Predatory Pricing to eliminate competitors:
Predatory pricing is when a firm will charge lower than their
average cost in order to eliminate their competitors. This
strategy is illegal in the UK.
Predatory pricing is a price strategy used by oligopolies and
its when a firm lowers their price below their average cost to
eliminate their competitors by intentionally making a loss on
their product. The aim of this is to eliminate all their
competitors to gain market share and increase the likelihood
of gaining monopoly power. Firms do this because they can
afford to take losses in the short run because of their large
supernormal profit reserves but other firms would not be able
to as they don't have enough supernormal profit reserves.
This is shown on the diagram as the original profit point at MC=MR at R and cost at C. When
firms want to eliminate their competitors, they set their price below their AC cost curve which is
at point AC=AR. This means that rational consumers will buy the product that is much cheaper
which means that the firm will gain more market share and will make supernormal profit in the
ling run. This can also be shown on the diagram as they make their loss in the shaded box
between C1 and R1, and quantity has increased from Q to Q1 showing that the firm has
increased their market share and potentially they have taken their competitors market share as
competitors with the new prices.
, Limit pricing to reduce contestability:
Limit Pricing is a pricing strategy used by
oligopolies and it is when a firm decreases their
price to reduce the contestability of their market
and keep their long run market share.
Contestability is the threat that a firm faces when a
potential entrant joins a market. When a firm uses
a limit pricing strategy, it reduces the contestability
as prices are now lower for a business with good
branding. This means that the barriers to entry are
higher as it will be harder for potential centrals to
match the lower price when joining the market
because they don't from economies of scale. This
means that the existing firm in the market will
benefit from this because they will continue to keep their market share rather than it being split
across new firms. On the diagram, the revenue curve shifts from R to R1 because of limit
pricing, as they charge lower to gain a higher contestability. Therefore they currently wont make
a profit or loss as they are breaking even. Therefore quantity will increase from Q to Q1 as with
a lower price, demand of the good/service will increase.
Predatory Pricing to eliminate competitors:
Predatory pricing is when a firm will charge lower than their
average cost in order to eliminate their competitors. This
strategy is illegal in the UK.
Predatory pricing is a price strategy used by oligopolies and
its when a firm lowers their price below their average cost to
eliminate their competitors by intentionally making a loss on
their product. The aim of this is to eliminate all their
competitors to gain market share and increase the likelihood
of gaining monopoly power. Firms do this because they can
afford to take losses in the short run because of their large
supernormal profit reserves but other firms would not be able
to as they don't have enough supernormal profit reserves.
This is shown on the diagram as the original profit point at MC=MR at R and cost at C. When
firms want to eliminate their competitors, they set their price below their AC cost curve which is
at point AC=AR. This means that rational consumers will buy the product that is much cheaper
which means that the firm will gain more market share and will make supernormal profit in the
ling run. This can also be shown on the diagram as they make their loss in the shaded box
between C1 and R1, and quantity has increased from Q to Q1 showing that the firm has
increased their market share and potentially they have taken their competitors market share as
competitors with the new prices.
