Limitations Of the Price Limit Model

Paper Summary:

The following paper critically analyzes the Limit Pricing Model, which uses limit pricing which is when companies form collusion or a cartel and try to maintain price levels which may or may not not maximize their profits or stop the entry of new firms in the market. One of the major limitations of the model discussed in this paper is that the model assumes collusion. Another limitation examined is that the model assumes the products to be homogeneous. The writer concludes, after discussing eight limitations of the model, that it is completely inappropriate.

From the Paper:

"In an oligopoly there are a few entrepreneurs who are in tight competition with each other and due to this the market price is sticky or we can say downward rigid. Oligopolists do not usually decrease price ("sticky downward prices"), and tend to change prices together. Rivals match each others price decrease which leads to a "price- war" and obviously they do end up losing in it and form a cartel. Cartels are an example of a collusive industry. Collusion occurs when firms in an industry agree to fix prices, divide the market among themselves, or otherwise restrict competition in some way."

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