Suppose Firm A sets a price below average variable cost for two years.After the second year,Firm A's biggest rival goes bankrupt and exits the market.In the third year,Firm A raises prices significantly.Firm A is practicing
A) average variable pricing.
B) inversion pricing.
C) competitive pricing.
D) collusion pricing.
E) predatory pricing.

Question

Quizplus · Accepted Answer

Firm A is using predatory pricing by setting prices below average variable cost for two years to drive its rival out of the market. After the exit of its biggest rival, Firm A raises the prices significantly to take advantage of its market power. This behavior is considered predatory pricing as it is aimed at eliminating competition and obtaining monopoly power.

Suppose Firm a Sets a Price Below Average Variable Cost