Page 299 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory Tanima Dutta, Lovely Professional University

Notes
Unit-17: Bain’s Limit Pricing Theory

CONTENTS
Objectives

Introduction

17.1 Limit Price Theory of Bain
17.2 Its Criticisms

17.3 Summary
17.4 Keywords

17.5 Review Questions

17.6 Further Readings

Objectives

After studying this unit, students will be able to:
• Know Limit Price Theory.
• Understand Bain’s Model.
• Know Product Differentiation.

Introduction

V.S. Bain is the first economist who proposed Limit Price Determination Theory in one of his articles.
Then he revised this theory in his first book Barriers to New Competition in 1956 and in 1959 in his
second book Industrial Organization. He represented that collusion firms can be afraid of probable
entrance of other firms. They cannot have substitutes of their commodities in definite range. But
if price is fixed at high level, then probably opposite firms are afraid of entrance. They can enter in
industry on attracting high profits. In this condition, the price is always high which is called Price
Limit. Established firms can charge this price without attracting entrance of other firms.
In his Barriers to New Competition, Bain has developed limit price determination theory for stopping
the entrance of new firms by giving more elaborated certified statement. In his book Industrial
Organization, he has given better statement of his theory. We are mentioning the Bain’s Theory
which has been described in his books.

17.1 Limit Price Theory of Bain

Bain has developed Limit Price Determination Theory to stop the entrance of new firms in a short
authorized industry in his book Barriers to New Competition (1959). Joining with collusion, limit price
is fixed by a group of firms, which is the highest general price. It is the price which can prevent the

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