Limit Price

1. The price above or below which one is willing or not willing to buy or sell a security. For example, one may wish to buy a stock if the price drops to $20 per share, hold if the price goes above $40, or sell at $30. Both cases represent limit prices. An investor tells his/her broker any applicable limit prices, by which the broker is required to abide.

2. A price of a product, especially a mass-produced product, sufficiently low so as to discourage new entry into that product's market. Monopolists set a limit price by increasing production to more than they otherwise need, which requires potential competitors to spend a greater amount in production in order to match the price. This renders competition unprofitable and maintains the monopolist's control of the market. The practice is illegal in most countries. See also: Antitrust.

Fig. 110 Limit pricing.

limit pricing

entry-forestalling price

a pricing strategy employed by established oligopolists (see OLIGOPOLY) in a market to exploit BARRIERS TO ENTRY in order to forestall new entry. A limit pricing model is shown in Fig. 110, where the barrier to entry is assumed to be ECONOMIES OF SCALE. Established firms produce a total output of OQ1, which is sold at price OP₁. The MINIMUM EFFICIENT SCALE of output for the entrant to be just as cost-effective as established firms is O1Q2 (equal to OQ). It will be seen that as a result of the addition of this ‘extra’ output to existing market supply OQ1, the market price is lowered to OP2, a price at which entry is unprofitable. Established firms are thus able to set an entry-limiting price of OP₁, thereby securing ABOVE-NORMAL PROFITS of the order AB.