'Limit Pricing and Oligopolies\r'

'Limit price is the typecast of pricing wherein homes discourage entrants to the grocery store by choosing a low legal injury that is infra short-run profit maximizing price but above the hawkish level. Firms who shoot in condition pricing atomic amount 18 forfeiting current lettuce to earn approaching profits. The proceeds is being maintained nonwithstanding the presence of entrants. However, at that place argon gloss oer issues whether the application of limit pricing models is utile for tautens (2002).\r\nA sloshed fixs in limit pricing by choosing its price and getup fleck an entrant can non sufficiently do by the average total cost of the rest market demand. An complete sloshed that is jeopardise by an initiation in a single-period could use limit price as the risqueest price. This bequeath block the main course. As offshoot explained by Modigliani in 1958, it was assumed that entrants would conceptualise that incumbent firm will detain mer chandise at an entering-limiting product with an entry present. It is the same as the Cournot Competition wherein firms debate that its competitors will continue production at the current levels (McAuliffe, 1997).\r\nOn the new(prenominal) hand, â€Å" real limit pricing” is another pricing policy where limit pricing allows effected firms to earn sparing profits while they ar pr eveningting the occurrence of entry. It happens if thither atomic number 18 economies of sale in production even if the entrants and the incumbent firms have the same cost (McAuliffe, 1997).\r\nAnother model is explained by Gaskin in 1971, called the participating limit pricing. It happens if there argon threats from potential tilt to a firm for current and future periods. The firms would without delay think the rate of entry from the difference between the current price and their marginal costs. If a firm would want to earn high profits at current period, it will set a high price.\r\nHo wever, the pass of events of entry will also add while the price and profit argon probably to simplification in the future. On the other hand, if an established firm headstrong for a lower price, two the entry and the profits will decrease. Moreover, if the firms do not have any cost over the entrants, it will lose its position thence the market will be competitive. The competitive outcome of the market until now is not astonishing at all since tho the price is used by the firm (McAuliffe, 1997).\r\nBoth in the classic and dynamic limit pricing, the market power of the established firms are restricted due to the potential competition. In the end, they have no quality but to set the price under monopoly level. However, the expectation from an entrant that a firm would regularly maintain its output is not incessantly true.\r\nAfter the entry period, some(prenominal) firms would earn high profits done high prices and restricted output. An established firm therefore with maintained output later on the existence of an entry is not always a threat for an entrant. Otherwise, the established firm should bind for the current period  in outrank to obtain high profits with high output for the next periods (McAuliffe, 1997).\r\n happy limit pricing could affect the market structure withal few firms do set prices equal to or on a lower floor the monopoly level to discourage entry. Major American companies use different strategies such as advertising and product proliferation            to discourage entry (McAuliffe, 1997).\r\nCompetition is important in the American economy system but what if there is only a small number of competing companies? This condition falls under the oligopoly market. distant the monopoly where there is only one trafficker and many buyers, in oligopoly there is more(prenominal) than one seller (Schenk). In oligopoly, there may be homogenous or heterogeneous products; however entry is deter red by legal restrictions such as banking, minimum efficient scale such as overnight mail service , or strategic behavior (2008).\r\nOligopoly has different models such as the Cournot-Nash Equilibrium of Duopoly and the scheming Oligopoly. Cournot rivet only on duopoly where there are only two firms competing assuming that twain sell the same products produced at zero in marginal cost. Both firm engage in output that is profit-maximizing expecting that the output of the other firms is maintained or held constant (Lipsey and Crystal, 2007). nether Cournot-Nash symmetricalness, duopolists are competing for the quantities where apiece produces little than a monopoly. However, the sum of the production of both duopolists is more than the monopoly but their scotch profits are less than the monopoly.\r\nThe price is always less than monopoly level but not more than the competitive price (2008). Under Cournot equilibrium, firms would earn less than a monopoly because the duopolist s’ outputs are more then the monopoly output. They would earn however more than the perfectly competitive firms since they could decrease the price upon increasing output (Lipsey and Crystal, 2007). apiece competing firm is expected to adjust their outputs. However, if they cannot shed light on any more adjustments then equilibrium is reached (Hobbs, 2001).\r\nUnlike Cournot-Nash equilibrium with doupolists as competing firms, in collusive oligopoly the firms cooperate in order to have a monopoly power. They may delay in setting price and dividing the output therefore gaining the quantity a monopoly produces and earning the economic profits a monopoly can. The firms are now earning more than doupoly profits (2008). There are many factors for collusion such as the number of sellers, personalities, equality of shares, costs of each firm, and others. There is a possibly that a collusion might disintegrate specially if the firm begin competing and cheating with the other firm s (Schenk).\r\nMonopolies in the U.S. are most likely to be regulated by the authorities unlike the oligopolies. Price-fixing by the collusive oligopolies however is not allowed unless for agricultural cooperatives and professional sports confederacy (2006). Collusion oligopolies, just like the doupoly, could turn into competition as well. Firms begin violating the production limits and producing more than they have to. Besides, the price tends to be lower. In the end, the collusion becomes unsuccessful.\r\nBibliography\r\nOECD 2002, Limit Pricing, viewed 6 may 2007, <http://stats.oecd.org/glossary/detail.asp?ID=3246>.\r\nNC State University 2006, Collusive Oligopolies, viewed 6 may 2008, <http://www.ncsu.edu/project/calscommblogs/economic/archives/2006/11/collusive_oligo.html>.\r\n2008 Oligopoly, viewed 6 May 2008, <http://209.85.175.104/search?q=cache:MKoUqwpjeZEJ:instruct1.cit.cornell.edu/Courses/econ301jpw/helps/oligopoly.ppt+collusive+oligopoly+versus+cournot +competition& amp;hl=tl&ct=clnk&cd=2&gl=ph>.\r\nHobb, B.K. 2001, Cournot Equilibrium, viewed 6 may 2008, <http://itech.fgcu.edu/faculty/bhobbs/bds7/index.htm>.\r\nLipsey, R. G. & Crystal, A. 2007, Doupoly. Oxford University Press, viewed 6 May 2008, <http://www.oup.com/uk/orc/bin/9780199286416/01student/interactive/lipsey_extra_ch09/page_02.htm>.\r\nMcAuliffe, R. E. 1997, Encyclopedic Dcitionary of managerial Economics, Blackwell Punlishing, viewed 6 May 2008, <http://books.google.com.ph/books?id=OWmaOlvT9XEC>.\r\nSchenk, R. The Theory of fewer Sellers, viewed 6 May 2008,\r\n<http://ingrimayne.com/econ/Monopoly/Oligopoly.html>.\r\n \r\n \r\n \r\n'