Glossary of competition terms

This Glossary was prepared by DG COMP and the OECD for non-competition specialists. Each term is enriched with references of national case laws from the e-Competitions Bulletin. (© European Union - © OECD)

Limit Pricing

Limit pricing refers to the pricing by incumbent firm(s) to deter or inhibit entry or the expansion of fringe firms. The limit price is below the short-run profit-maximizing price but above the competitive level.

There are a number of models of limit pricing and a considerable debate over the issue of whether it is in fact profitable for firms to engage in such behaviour. Limit pricing implies that firms sacrifice current profits in order to deter entry and earn future profits. It is not clear whether this strategy is always superior to one where current prices (and profits) are higher, but decline over time as entry occurs.

In the early literature on limit pricing, the ability of incumbents to establish such prices was linked to the existence of structural barriers to entry. However, this required rather stringent assumptions about the behaviour of incumbents, notably that incumbents would maintain output in the face of entry, and that this threat was believed by potential entrants. The more recent literature has focused on strategic barriers to entry, notably the actions which incumbents can take to persuade entrants that they will not accommodate entry. (...)