Question

An incumbent firm can squeeze out its competitors by setting the predatory price at below its opponent’s exit price without changing its output - True, False or Uncertain. Explain.

Answer 1

True

a pricing strategy used by an incumbent firm solely to squeeze out its competitors is called predatory pricing strategy.

In predatory pricing the firm set their current prices for the goods and services provided by them below its competitors exit price without changing its output in order to gain all the potential customers and this in turn will lead to the competitors to loose their customers to the said incumbent firm.

Such low prices will either result in the competitors to loose all of their customers or will make them lower their own prices to match with that of the incumbent firm prices but this agian will make them bear losses by operating at such low prices. Thus, ultimately resulting in the competitors to exit the market.

Predatory pricing will also lead to the said incumbent firm to sustain losses for the period for which it lowers its prices but these losses will only be temporary i.e. only for a limited period of time till the competitors exit the market. After that stage, the incumbent firm can raise the prices to earn the maximum profits they can and this will result in the incumbent to compensate for the losses they incurred during the time of predatory pricing implementation.