Pricing strategies and contestable markets

Question 1

Define cost-plus pricing

Answer 1

a pricing policy whereby firms set their price by adding a mark-up to average cost.

Question 2

Define predatory pricing

Answer 2

an anti-competitive strategy in which a firm sets price below average variable cost in an attempt to force a rival or rivals out of the market and achieve market dominance

Question 3

Define Price limit

Answer 3

the highest price that an existing firm can set without enabling new firms to enter the market and make a profit

Question 4

Define contestable market

Answer 4

a market which the existing firm makes only normal profit, as it cannot set a higher price without attracting entry, owing to the absence of barriers to entry and sunk costs

Question 5

Define a hit and run entry

Answer 5

where a firm enters a market to take short-run supernormal profits knowing it can exist without incurring costs