Strategic Behavior of marketing

Limit price models suggest a relatively sanguine attitude toward the exercise of market power by dominant firms. In a world of limit price behavior, dominant firms that wish to preserve their position can charge a price no higher than the average cost expected by a new firm after entry. Dynamic limit price models predict that dominant firms will yield market share over time and gradually give up the ability to control the market price.Consideration of possible strategic behavior by dominant firms suggests a much less optimistic view.

A dominant firm can employ a number of tactics to discourage entry or expansion by rivals and to preserve its market position while continuing to exercise market power. In markets where such strategies are used, policymakers will have to cope with the prospect of long – term exercise of market power by dominant firms.

Before World War II, the aluminum company of America Alcoa was the only domestic U.S. producer of aluminum ingot from ore. It faced some competition from recyclers who produced aluminum ingot from scrap aluminum. Alcoa owed its dominant position to licenses that allowed it to use a low – cost production technique under patent protection, bit it maintained its position after the basic patent expired in 1909. In a suit alleging monopolization of the aluminum ingot market the government accused Alcoa of purchasing bauxite deposits beyond its own needs to deny potential competitors access to material necessary for the production of aluminum ingot. The government also alleged that Alcoa had signed contracts with public utilities designed to prevent competitors from purchasing low – cost electric power production of aluminum ingot requires a great deal of electric power. In the view of the courts the government did not succeed in proving that Alcoa had acted to preserve its monopoly.