Question

1. Briefly describe limit pricing and predatory pricing as used by some oligopoly firms, and then explain which form of pricing would be more likely used to eliminate some current competition.

Answer 1

Limit Pricing refers to pricing strategy used by oligopoly firms to deter new firms from entering in the market. In this pricing strategy, prices are fixed low enough to make it unprofitable for new players to enter in the market.This makes lesser profits in the short run but super- normal profits in the long run. On the other hand, Predatory pricing is somewhat equivalent to Limit Pricing and is defined as pricing strategy in which firms set prices very low to drive competitors away from the market.This is extremely beneficial for consumers in the short run as they are getting desired products at low prices but they are likely to suffer in the long run as prices may go up with less competition in the long run.

Predatory pricing is illegal in many countries therefore it is better to use Limit pricing as a tool to eliminate current competition and is successful more in large sector industries like steel industry, and will give advantage to the incumbent and disadvantage to the new entrants.