Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10. In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,it must be able to

Question

Burger Doodle,the incumbent firm,wishes to set a limit price of $8 rather than the profit-maximizing price of $12)to prevent Designer Burger from entering its profitable market.The game tree above shows the payoffs for various decisions.Burger Doodle makes its pricing decision,then Designer Burger decides whether to enter or stay out of the market.If Designer Burger chooses to enter the market,then Burger Doodle may or may not decide to accommodate Designer's entry by changing its initial price to the Nash equilibrium price of $10.  In order for Burger Doodle to successfully implement a limit pricing strategy for entry deterrence,it must be able to

Quizplus · Accepted Answer

In order for a limit pricing strategy to be successful, the incumbent firm must make a credible commitment to maintain its initial price should the potential entrant choose to enter the market. This means that the incumbent firm must be willing and able to withstand the short-term losses that may result from staying at a suboptimal profit-maximizing price in order to deter entry in the long-term. Option A is incorrect because it assumes that Designer Burger has already decided to stay out of the market, which is not necessarily the case. Option B is incorrect because it assumes that Designer Burger has already decided to enter the market, which is again not necessarily the case. Option D is incorrect because promising to price its burgers at $12 contradicts the entire strategy of limit pricing. Finally, option E is incorrect because threatening to lower its price to $8 does not necessarily deter entry and also risks retaliation from Designer Burger.

Burger Doodle,the Incumbent Firm,wishes to Set a Limit Price of $8