what are the disadvantages of limit pricing?

what are the disadvantages of limit pricing?

pls help

Reply 1

.x.g.x.

hi, isnt limit pricing when you stop new entrants from coming into the markets? it happens in oligopolistic industries so there is imperfect competition which is a type of market failure, which i suppose is a disadvantage?

Reply 2

Multiplexed

Reduced profit margins
Protects their industry and thus the firms are inefficient because of lack of competition.
Worse off for the consumers in aspect that there will be no Dynamic efficieny.
Worse off for other firms trying to enter the market.
Worse off for Government because of a less saturated, competitive, efficient and growing market aswell as a decrease in tax revenues.

Reply 3

BAEconyr3

Limit pricing is a strategy adopted by firms in an oligopoliostic market to gain market power. The main disadvantage is that short term profits are sacrificed but this in turn increases long run profits. Consider Firm A selling coke at 50p (true cost is 30p), so thu smaking 20p profit per coke can. If Firm B wishes to enter, it must sell above 30p as its a new entrant hence needs to maximise profits at MC=MR. Firm A can afford to sell at 32p i.e. low profit margin, this in turn will drive firm B to leave the market as Firm B cannot afford to sell at such a low price. The disadvantages of this are obviously low profits but this also affects the firms revenue and can be argued if firms continuously use such a strategy, consumer loyality may also be affected as consumers may find the firm to be 'playing games'.

Just thought of those on top of my head, if i think of any more will let you know. Hope it helps.

T

Reply 4

Book

What;s the difference between predatory pricing and limit pricing?

Reply 5

BAEconyr3

Predatory pricing is below cost price, i.e. very low prices whilst limit pricing is just at cost price. http://en.wikipedia.org/wiki/Predatory_pricing

Reply 6

Book

Does this mean limit pricing makes no profit in the short run? Or does it just mean no supernormal profit? Cheers.

Reply 7

Nice'n'Easy

Original post by Book

Does this mean limit pricing makes no profit in the short run? Or does it just mean no supernormal profit? Cheers.

They will still make a profit in the SR as a set amount of profit is included into costs. The cost of the unit includes the opportunity cost of letting the money sit in the bank and the risk taken, perhaps 20%.

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