Effective limit pricing between one incumbent firm and one potential entrant involves
A)the incumbent linking the pre-entry price to post-entry profits.
B)the incumbent reducing price below the monopoly price to prevent entry.
C)the incumbent linking the pre-entry price to post-entry profits and the incumbent reducing price below the monopoly price to prevent entry.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

Effective limit pricing involves both the incumbent firm reducing its price below the monopoly level to deter entry and linking the pre-entry price to post-entry profits. By doing so, the incumbent firm signals to potential entrants that the profitability of entering the market is low, even if they were able to successfully enter. This makes potential entry less attractive and helps the incumbent firm maintain its market power.

Effective Limit Pricing Between One Incumbent Firm and One Potential