The Student Room Group
Competition - post a photo you've taken of nature >>
Competition - post a photo you've taken of nature >>
Competition - post a photo you've taken of nature >>

Why do firms in perfectly contestable markets lower their prices?

If they lower prices to the point where they break even, isn't it better to just continue earning super normal profit until new firms enter? In both instances they would end up earning normal profit right? Or do losses start occurring when many new firms enter as firms look to undercut?
If you lower prices to only make normal profit, their wouldn't be any chance of innovation I think.
Reply 2
Avatar for Maker
Maker
20
Lowering the price could increase volume which means you can run your factory more efficiently assuming you are in manufacturing. You can also take customers from your competitors and lower their volumes and increase their costs as they have to run their factories less efficiently.

Once you have the customer, you can sell them additional products and services like spare parts, consultation services and service contracts which may be more profitable.
(edited 6 years ago)
Original post by Maker
Lowering the price could increase volume which means you can run your factory more efficiently assuming you are in manufacturing. You can also take customers from your competitors and lower their volumes and increase their costs as they have to run their factories less efficiently.

Once you have the customer, you can sell them additional products and services like spare parts, consultation services and service contracts which may be more profitable.


Thanks. Can that be summarised as saying lowering prices would help maintain market share?
Thanks, not really got any examples no, which is unfortunate. That does make sense however it's not quite what I need to know.

I think the answer is related to market share of each firm when comparing highly competitive and not so competitive markets.
Reply 5
Avatar for Maker
Maker
20
Original post by dont know it
Thanks. Can that be summarised as saying lowering prices would help maintain market share?


I would say one of the main motivations to lower prices is to increase market share and increase volume. By lowering the price and increasing the volume, the company will hope to offset lower per unit profit for a larger volume of units sold.
(edited 6 years ago)
Original post by Maker
I would say one of the main motivations to lower prices is to increase market share and increase volume.


Oh right! Thank you.
Reply 7
Avatar for Xanarchy
Xanarchy
5
Contestable markets exist when there are no barriers to entry or exits, such as sunk costs related to a market. If a firm exists in such a market, the threat of potential competition (i.e. through hit-and-run competition) is constant, meaning they are incentivised to behave in a productively efficient manner in order to maintain their market share.

Quick Reply

Related discussions

Latest

Trending

Trending

Articles for you