Limit Pricing

Limit pricing is the strategy of setting the market price at — or just below — a rival's marginal cost to deter profitable entry or to drive out a higher-cost incumbent. In asymmetric Bertrand Competition with $MC_1 < MC_2$, the efficient firm 1 limit-prices at $P = \min(c_2, P_1^M)$: any price below $c_2$ makes firm 2's continued production unprofitable.

When to use

Use limit pricing whenever you have an efficient firm facing one or more higher-cost rivals or potential entrants. The lecture's logic is mechanical — undercut by an arbitrarily small amount $\varepsilon$ to capture the market — but the realistic version (against potential entrants) requires the limit price to be credible before entry occurs, which connects to incumbency-advantage and capacity-commitment arguments.