Limit pricing is
A)a strategy where a firm temporarily prices below its marginal costs to drive competitors out of the market.
B)a strategy used by a vertically integrated firm to raise rival's costs of inputs, while holding constant final product prices.
C)when an incumbent maintains a price below the monopoly price in order to prevent entry.
D)the act of charging a low price initially upon entering a market to gain market share.

Question

Quizplus · Accepted Answer

Limit pricing refers to a situation where an incumbent firm sets a price below the monopoly price in order to discourage new entrants from entering the market. This is done by making it unprofitable for new entrants to enter the market and compete with the incumbent because they are unable to cover their costs at such a low price. As a result, the incumbent is able to maintain its dominant position in the market and charge a higher price than it would have been able to do otherwise. Option A refers to predatory pricing, option B is an example of input pricing, while option D refers to penetration pricing.

Limit Pricing Is