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limit pricing


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A policy for an incumbent firm of discouraging entry to its market by charging a low enough price for entry to appear unprofitable to other firms. This is contrasted with a policy of short-run profit maximization, where the price is high enough to attract entry, which will lead to a gradual loss of sales, as customers come to know of alternative suppliers. There is thus a trade-off between large but temporary and smaller but more sustained profits. Limit pricing is not a credible threat: the limit price is not the optimal strategy after entry has occurred.

Subjects: Economics.


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