What situation occurs if an incumbent firm with increasing marginal costs or limited capacity sets a price just below the entrants' marginal costs even though the incumbent may be unable to meet all market demand (or possibly may have to sacrifice its profits to do so)?
A)Contestable limit pricing
B)Strategic limit pricing
C)Predatory pricing
D)Quality pricing
E)Capacity expansion

Question

Quizplus · Accepted Answer

This situation is an example of strategic limit pricing, where the incumbent firm sets a low price to deter entry or limit the market share of the entrants. The incumbent firm may be willing to sacrifice some profits to prevent competitors from entering the market or gaining a substantial foothold in the market. This behavior is strategic because it can avoid the need for price competition in the future, and it may signal the entrants that the market is not profitable enough to justify their investment. This can be an effective strategy when the entrants have limited resources or face high fixed costs of entry. The other options do not fit this scenario as well. Contestable limit pricing implies the threat of entry is enough to discipline the incumbent's pricing behavior, which may not be the case here. Predatory pricing implies an intent to drive competitors out of the market, which may be unlikely if the incumbent has limited capacity. Quality pricing and capacity expansion are not relevant in this case as they do not involve pricing strategies to deter entry or limit market share.

What Situation Occurs If an Incumbent Firm with Increasing Marginal