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Unit-17: Bain’s Limit Pricing Theory

production Q and will sell them at limit price P on the given maximum scale of plant to stop the entry. Notes
L
L
Minimum and maximum plant produce possible entrant firm Q which fulfils its average production
E
cost. Therefore, G is the Scale Barrier or entry gap for this firm. If established firms put their production
on Q level and permit new firm to enter in the market and to sell their minimum maximum production
L
Q then quantity production Q will increase in the market. It will be OQ = OQ + OQ . As a result,
E E E L
market price will fall little than competitor price P because established firms put their production
C
before entry level and permit collected entrant firm production to reduce the price.

Give your opinion on Constant Price.

Absolute Cost Advantages

According to Bain, absolute cost barrier can be obtained by—(1) utilising the best production technique
by established firms by the secrecy or patent; (2) only one ownership of major collection of resources of
established firms (3) unable to use the resources of necessary production by like capacity of obtaining
the organizing services, labour means, constituents, etc. on the favourable conditions by the entrant
firms which is obtained by established firms. (4) Working of established firms close to the sources of
raw materials. (5) less favorable conditions of untidy sum for investment of entrant firm, which is
imaged in the simple availability of sums in high effective interest or necessary quantities (6) less cost
due to the production reaction of established firms and (7) less price of raw materials due to the only
one purchase agreement with sale in large quantity or wholesaler by the established firms.
If established firms obtained these absolute cost advantages, then they work as barriers of the entry of
new firms. If these costs are given then established firms can earn benefits on those prices which are
less than the cost. Entry of firm can be terminated by lowering down the average production cost by
fixing the limit price. It is shown in Fig. 17.4 that LAC is the long-term average cost curve of established
firms. They fix limit price (or entry barrier price) P and demand curve DD fixes limit production Q
L
L
on this price. LAC is the long-term average cost curve of possible entrant firm which is even higher
E
than limit price P . Demand curve of this firm is D which is parallel to market demand curve DD. This
L E
demand curve D is situated under LAC of possible entrant firm, so that this firm cannot fulfill its
E
E
Fig. 17.4

D

Price and Cost P L C G LAC E

P
LAC

D
E D

O
Q Output
L

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