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Unit-17: Bain’s Limit Pricing Theory

entry of other firms in the established firm industry without motivating it. This price can be less than the Notes
profit maximum price in short duration and will depend on relative cost of firms of inside and outside
the group and demand conditions in industry. Bain tells the limit price is upper maximum price than the
competitor price, which is fixed by established firms. These price works as the barrier of entrance of new
firms. The profits obtained by upper established firms of new entrants in the industry are the barriers of
entrance.

Self Assessment

Fill in the blanks:
1. .............................. are done for price and production in long-term.
2. .............................. are established least right in industry.
3. Other firms in group follow .............................. price policy.
4. .............................. is effective in established firms.

Its Assumptions

Bain’s Model depends on following assumptions—
1. Adjustments are done for price and production in long-term.
2. Least Right firms are established in the industry.
3. Demand curve for production of industry is not affected by the entrance of new firms or price
adjustments by least right firms.
4. Collusion is potential among established firms. This trick pact depends on chief leader.
5. Other firms follow unification price policy in group.
6. Lead firm fixes limit price or entry barrier price, under which entry cannot be done.
7. There is only one probable entrant firm whose investments are less in comparison to other probable
entrants.

Joining with collusion, limit price is fixed by a group of firms, which is the highest
general price.

Bain Model
Bain initiates his limit price determination model by the conditions of entrance. It is premium or per
cents by which established firms can raise price than the competitor price without attracting the entrance
of new firms in group.
Symbolically, condition of entrance,
P – P
L

E = _______ C and P = P (1 + E)

P L C
C
Where P is limit price and P is competitor price. Formula shows that E is the premium which
L C
established firms obtain limit price (P ) without attracting the entrance of new firms. When established
L
firms fix P above P , they earn more than general profit because competitor price is P = LAC in which
L
C
C
general profit is also included. Therefore, E is the end limit above competitor price, P (or premium),
C
which established firms earn fixing the high limit price (P ).
L
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