Limit Pricing Case Study
Historically, there have been substantial costs of entry into the steel industry. The technology favors vertical integration at least from the extraction of iron through smelting, refining, rolling, and the production of finished steel products such as steel plate and bars. Fully integrated entry requires a substantial investment. Because such entry is risky, the cost [...]
Closer look market
One assumption of the static limit price model is that the potential entrant/ fringe firm expects the dominant firm to maintain output in the face of entry. We used this assumption to draw a residual demand curve for the potential entrant Figure 4 – 1. The entrant may very well expect different behavior from [...]
Market Performance under Dynamic Limit Pricing
If entry costs are sufficiently small, the monopolist would have to expand output greatly to prevent entry. In this case, the most profitable thing for the dominant firm to do is to set a higher price and give up market share. Eventually, the market will be supplied by several firms of roughly equal size. Such [...]
Dynamic Limit Pricing (II)
In fringe firms can increase their output rapidly and take market share away from the dominant firm quickly, the dominant firm the gain little by setting a high price. High short – run profits will evaporate quickly, as will market share. When fringe firms can expand rapidly, a dominant firm is more likely to hold [...]
