Pricing Strategies in an Oligopoly

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Different Pricing Strategies

1. Price Wars

This occurs when one firm reduces their prices to maximise the amount of products sold, leading to greater profit being made. This results in the competitor firm losing market share and making less profit as they will make less sales due to their prices being higher. Consequently, they want to also cut their prices. This starts a price war as now the original firm wants to reduce their prices further.

2. Price Leadership

In a market where a dominant firm exists, they will act to change prices as they know other firms will follow. This is because price wars and other forms of retaliation are likely to occur within this market. As a result, the dominant firm becomes the established leader.

3. Predatory Pricing

This is usually a short-term measure which involves a firm cutting prices below the average cost of production to push its competitors out of the market. Once the other firms have been forced out of the market, it will raise its prices again to make supernormal profits.

4. Limit Pricing

This occurs when firms cut prices to deter entry of other firms into the market. Competitors looking to enter the market will be discouraged as they would not be able to compete with the higher-cost firms already existing within the market.

Non-Price Competition

This is when firms compete without changing its prices, in order to make demand for their products price inelastic. Instead, it uses other methods to increase sales, such as:

• Advertisement
• Product Quality
• Customer Loyalty
• Free Gifts

Quick Fire Quiz – Knowledge Check

1. Identify and explain four different Pricing Strategies (8 marks)

2. Explain what a ‘Price War’ is (4 marks)

3. Distinguish between ‘Limit Pricing’ and ‘Predatory Pricing’ (4 marks)

4. Explain what ‘Non-Price Competition’ is (4 marks)

Next Revision Topics

• Oligopoly
• Game Theory
• Concentration Ratios
• Monopoly
• Monopolistic Competition
• Perfect Competition
• Efficiency
• Monopsony
• Price Discrimination
• Contestability

A Level Economics Past Papers

• AQA
• Edexcel
• OCR
• WJEC