Limit Price OR Limit Pricing is one of the main objectives of firms. Besides maximising profit, firms will always also implement policies to help them stay in the market and fight against other competitors.

A limit price is a price, or pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market. It is used by monopolists to discourage entry into a market, and is illegal in many countries.

It leads to less profit than possible in short-term, but it can enable the firm to retain its monopoly position and long-term profitability.

Therefore, rather than encouraging a new firm to enter, the monopolist may decide to set a price below this profit maximising level, but still high enough to enable it to make higher profits than in a competitive market.

For limit pricing to be effective, the monopolist needs to decrease the price to the point where a new firm will not be able to make any profit on entering the market.

Evaluation of limit pricing

A large multinational may be willing to enter a market – even if it is unprofitable in the short-term. The large multinational can use its reserves and profit elsewhere to subsidies a loss-making entry. Limit pricing is not effective if new firms have the capacity to absorb losses.
Rather than limit pricing, a firm may set the profit maximising price, but then react when a new firm enters. If a new firm enters, it lowers the price to make it difficult. It could go to an extreme and engage in the predatory price – setting the price below average cost to force the rival out of business. Predatory pricing is illegal, which is a reason to choose limit pricing instead.
Limit pricing will be more effective in industries with substantial economies of scale – for example, industries, such as steel and aeroplane manufacture. It gives an advantage to the incumbent and disadvantage to potential new firms. For industries, with few economies of scale, such as restaurants and bars, limit pricing will not be effective

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