Economics – Differing objectives and policies of firms | e-Consult
Differing objectives and policies of firms (1 questions)
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(a) Definition: Predatory pricing occurs when a firm sets its price below its average total cost (ATC) with the intention of driving competitors out of the market and then raising prices once the competition is eliminated. This is a form of anti-competitive behaviour.
(b) Reasons for engaging in predatory pricing:
- Gaining Market Share: The primary goal is to gain a significant market share, often in an oligopolistic market.
- Eliminating Competitors: By driving rivals out of business, the predatory firm reduces competition and increases its profitability.
- Creating Barriers to Entry: A strong market position built through predatory pricing can deter new firms from entering the market.
- Profit Maximization (Long-Term): While initially incurring losses, the firm anticipates higher profits in the long run due to reduced competition.