Limit pricing
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Limit pricing is when an established firm (the incumbent) keeps its price low enough that a new firm could not make a profit by entering, while the incumbent still earns some profit. The price is set by the "limit" of what would tempt an entrant, not by what would maximise short-term profit. The incumbent gives up some profit today to protect its market power tomorrow. It works best where entrants face high costs of getting started.
Example
Suppose an airline dominates a route where airport slots are scarce and costly to obtain. It may keep fares only modestly above its own costs. A newcomer, who would have to pay for slots and build a customer base, sees no profit in entering. The incumbent keeps the route and still makes money.
Don't confuse with
- Predatory pricing: selling below cost to drive out rivals or deter entry, and then recovering the losses later with higher prices. It can be an abuse of dominance under Section 4 of the Competition Act 2002. Under limit pricing, the incumbent stays profitable throughout.
Related concepts
- Monopolistic competition
- Oligopoly
- Duopoly
- Kinked demand curve
- Price leadership
- Contestable market
- Collusion
- Cartel