Effective limit pricing between one incumbent firm and one potential entrant involves:
A) the incumbent linking the pre-entry price to post-entry profits only.
B) the incumbent reducing price below the monopoly price to prevent entry only.
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 are correct.

Question

Quizplus · Accepted Answer

Effective limit pricing between one incumbent firm and one potential entrant involves both linking the pre-entry price to post-entry profits and reducing price below the monopoly price to prevent entry. The incumbent can potentially deter entry by setting a low enough price to prevent the entrant from making a profit even if they enter the market. This is known as linking pre-entry price to post-entry profits. Additionally, if the incumbent reduces price below the monopoly price, it can potentially make it unprofitable for the entrant to enter the market since they would have to price their product lower than the incumbent, leading to lower profits for both firms. Therefore, the best choice is C.

Effective Limit Pricing Between One Incumbent Firm and One Potential