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Assume you are the manager of a firm that is currently competing primarily with one other competitor in an oligopoly market
Assume you are the manager of a firm that is currently competing primarily with one other competitor in an oligopoly market.
If you want to try to eliminate your firm's primary competitor, should you utilize a strategy of limit pricing or a strategy of predatory pricing? (Select only one pricing strategy; not both strategies or combinations of both strategies.)
Explain the reasoning behind the decision.
Describe the conditions under which the strategy you would use will likely be most successful.
Expert Solution
Answer: Predatory Pricing
Predatory pricing should be used because you are still competing against an existing firm. Limit pricing should only be used to prevent new firms from entering your market but likely won't work to get a firm to leave. This is because predatory pricing purposefully causes a loss by charging a price below the average variable cost so the other firm will leave due to losses as well. One the firm leaves you can raise prices to the limit pricing level to prevent new firms from entering but still making a healthy profit.
This strategy works best when your firm has the lowest of equal costs compared to others. If you try predatory pricing and another firm has lower costs, they might be able to still make a profit or at least outlast you.
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