limit pricing

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.
Limit pricingclick for a larger image
Fig. 110 Limit pricing.

limit pricing

or

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.
References in periodicals archive ?
The consumer surplus gains from low limit pricing will generally exceed the losses to the incumbent before entry.
If the case did not fit into Scenario #3, it was only because Pacific's price cut may have been before it was aware of Barry Wright's entry plan, so that the case may have been closer to the limit pricing of Scenario #1.
If, however, these advantages are not used for limit pricing as in Scenario #1 but are instead used to deter entry and to retake a market after entry, then consumers do not benefit and the monopoly should not be able to use its superiority as a shield against a monopolization charge.
If courts insisted upon a price freeze even though costs fell before entry, this would only encourage firms attempting the limit pricing strategy to remain vigilant in keeping prices low.
Limit pricing will then be attractive, because very little short-run profit needs to be sacrificed to prevent entry and preserve stage 2 profits.
limit] during the period of limit pricing (stage 1) and [f[pi].
Comparing the investment with its return, we see that limit pricing is the best course if
Otherwise, limit pricing will seem more attractive.
Hence, the new category of predatory pricing gives consumers one of two ex ante benefits in this case: (1) limit pricing or (2) entry and low stage 2 pricing.
Even if no entrant emerges, consumers will benefit from the incumbent's limit pricing.
While some early signs may indicate pricing started to improve for large players, Fitch expects that competition will continue to limit pricing flexibility.
Moreover, the global trend to reduce health care costs at all levels could limit pricing flexibility.