13 - Advanced Topics Flashcards
Limit Pricing
When a firm with market power sets price below the monopoly price to discourage entry.
Preentry Price Linked to Postentry Profits
Commitments made by incumbents
Learning curve effects
Incomplete information
Reputation effects
Commitment Mechanisms
Linking preeentry price to Postentry profits of the entrant.
Incumbent publicly tying its own hands - binding itself to maintain or increase to a higher level of output in response to entry. This is counter intuitive but chills interest in entry.
Expl - incumbent could build a plant that must produce the higher quantity as a minimum.
Lower initial price leads to Postentry profits.
Learning Curve Effect
Incumbent produces higher qty as first mover to gain greater experience. The greater experience lowers future period costs.
Lower initial price leads to postentry profits.
Incomplete Information
When low incumbent prices signal low costs rather than small margin. Entry cooled because they assume incumbent’s costs are lower.
Lower initial price leads to postentry profits.
Reputation Effects
Successful entry encourages more entrants.
Low price and reputation for making entry tough from the beginning.
Lower initial price leads to postentry profits.
Limit Pricing vs Duopoly
Since limit pricing reduces profits in all periods and in an emerging duopoly the incumbent captures monopoly profit till entry, the later may be more profitable in the long run. For limit pricing to be more profitable, then: €L>€M
Predatory Pricing
When a firm charges a price below its own marginal cost to drive an existing competitor out of the market. Legally - price below MC and sustain losses for sake of inflicting damage on rival.
Predator must be healthier than the prey.
Countermeasures:
Prey pauses production to let predictor bleed.
Prey buys cheap from predator to resell once prices go back up.
Raising Rival’s Costs
MC strategy - my lowering price and increasing qty, rival inclined to lower qty and cost below their MC.
FC strategy - increasing everyone’s fixed costs by welcoming regulation may create greater barriers and pressure on rivals.
Two strategies for vertical integrated firms
Vertical Foreclosure
Price-Cost Squeeze
Two strategies for vertical integrated firms
Vertical Foreclosure:
Not selling outputs to downstream competitors. This reduces upstream profits but can drive downstream competitors out.
Price-Cost Squeeze
Increasing upstream component costs and lowering downstream prices to squeeze competitors possible margins.
Firm trade short term profit for higher future.
Price Discrimination as a multiplier of effect
Discrimination increases effectiveness by giving the controlling party the ability to focus impact through limit pricing, predatory pricing or raising rival cost. The firm can increase costs fir select competitors or reduce prices for select customers and otherwise maintain monopoly positions writ others and increase profits.
Preferable to all-or-nothing approach
