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Unit-17: Bain’s Limit Pricing Theory

This inspired possible entrant firm to enter in the market and its demand curve rises to DE . New firm Notes
1
Q can produce quantity of any commodity at level. That amount of P price which is more than the P
E L C
is the “height” of entry gap or entry barrier, which is denoted by G in the figure.

Self Assessment

Multiple choice questions:
5. Bain does his Limit Price Determination Model by the condition of entrance–
(a) initiate (b) finish
(c) interactions (d) none of these
6. According to Bain, the time duration included in entry situation is-
(a) Short (b) Long
(c) Zero (d) None of these
7. There is only one possible entrant firm, which has its costs in comparison to other possible entrants-
(a) more (b) general
(c) less (d) none of these
8. Bain mentions …………….. main sources of Entry Barriers.
(a) two (b) three

(c) five (d) four

Economies of Scale

Economies of scale are obtained by indivisibilities and specification in production and management
and advantages from division of labour. R and D also affect marketing and distribution. Factors of
economies of sales at level of limit price depend on the (a) expectations of entrant firm about reactions of
established firm after the entry of possible entrant firm; and (b) expectations of established firms about
the behaviour of entering firms.
Bain describes six possible expectations of possible entrant firms: (1) It expects from established
firm that they keep the price constant after entry level. (2) It expects from established firms that they
keep the production constant after entry level. (3) It expects from established firm that they let partly
decrease their production and decrease their price but less than the above two possibilities. (4) It
expects changes by the established firms so that they increase their before entry production. (5) It
expects from the established firms that they decrease their production so that price raises higher than
before entry level. (6) It expects the entry in industry without observing from any established firm
because its plant is of very short scale so that established firms neither change their production nor
change their market price.
From the above mentioned six possible expectations by possible entrant firm, Bain means third
one most actual and possible. It is because entrant firm expects from established firm that they will
partly decrease their production and will let partly fall the price. We will describe only two possible
conditions.

Bain initiates his limit price determination model with the conditions of entrance

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