Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns $85 million per year. By reducing its price by 50 percent, Way Cool could discourage entry into "its" market, but doing so would cause its profits to sink to -$6 million. By pricing such that other firms would be able to enter the market, Way Cool's profits would drop to $35 million for the indefinite future.
In light of these estimates, do you think it is profitable for Way Cool to engage in limit pricing?
- More information is needed to answer this question.
- Yes - limit pricing is profitable.
- No - limit pricing is not profitable.