Limit pricing
Definition. Limit pricing is a strategy in which an incumbent firm sets its price low enough to deter potential rivals from entering the market. By pricing below the level a new entrant would need to cover its costs, the established firm sacrifices some short run profit to protect its market position.
Limit pricing acts as a barrier to entry and helps incumbents preserve market power over time. It is most effective when the incumbent has a cost advantage, such as economies of scale, that an entrant cannot easily match.
This term belongs to Barriers to Entry in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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