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Limitations Of The Limit Pricing Model - College Papers

Limitations Of The Limit Pricing Model

LIMITATIONS OF THE PRICE LIMIT MODEL:

Summary: This is a 5 page paper that analyzes the various aspects of the limitation of limit pricing model. It uses 2 sources.

INTRODUCTION:

In an oligopoly there are a few entrepreneurs who are in tight competition with each other and due to this the market price is sticky or we can say downward rigid. Oligopolists do not usually decrease price ("sticky downward prices"), and tend to change prices together. Rivals match each others price decrease which leads to a "price- war" and obviously they do end up losing in it and form a cartel. Cartels are an example of a collusive industry. Collusion occurs when firms in an industry agree to fix ...

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but stop the entry of new firms in the market.

LIMITATIONS OF THE MODEL:

Limitations of the model can be pointed out by criticizing the assumptions of the model and by analyzing the limitations of each criticism.

1. One of the major limitations of the model is that it assumes collusion:

There are various obstacles to collusion:

a) It is very hard to agree on a particular level of price because the companies have different level of costs and have different market shares. Their product has a different quality to each and can be distinguished if they stress on the quality in the advertisements. Each company has a different level of average and marginal cost. The amount of labor force hired and their pay scale is different too. The variable cost differs if the quantity of the goods produced is different and the quantity produced of different firms will obviously be different. So how can all firms agree on one price when their costs are not the same? This way one ...

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adopted by most of the entrepreneurs now a days and that has been stated above. It is making your brand name so popular with the help of various advertising media's that the product even if it is the same seems different. The brand name should be important. The producers are now selling their names not the product.

3. Not changing price is unrealistic: In the world of today there are price changes every day. If one assumes that we can fix prices then it is unrealistic as prices are constantly changing due to various reasons:

a) Taxes charged by the govt. are increasing day by day. Increase in taxes means increase in the level of price.

b) Entry of a new producer in the market ...

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Limitations Of The Limit Pricing Model. (2015, July 23). Retrieved December 23, 2024, from http://www.essayworld.com/essays/Limitations-Of-The-Limit-Pricing-Model/104816

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PAPER DETAILS

Added: 7/23/2015 02:41:27 AM
Category: Economics
Type: Premium Paper
Words: 1321
Pages: 5

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