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Bain limit pricing theory | Bain model | price limit | h l ahuja advanced microeconomics
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Theory of Limit Pricing
• The traditional oligopoly models do not focus on the impact of the entry of a new firm. Recently, it has been argued by several economists, prominent among whom are Bain, Sylos-Labini, Andrews, Modigliani, and Jagdish Bhagwati that price-output decisions of the existing firms in oligopolistic markets are affected not only by the actual entry but also by the potential entry of firms. oligopolistic firms give preference long-run profit over the maximise short-run profits.
• pioneering work 'A Note on Pricing in Monopoly and Oligopoly, (1949) followed by his book 'Barriers to New Competition', J. S. Bain put forward the theory of limit-pricing which in essence implies that firms do not maximise short-run profits because of the fear that the excessive or abnormal profits in the short run will induce the entry of new firms which will greatly reduce their profits in the long run.

Basics of the Theory of Limit Pricing: Bain's Model
Bain's¹ theory of limit pricing relates to the case of collusive oligopoly. The limit price is the highest price that the existing firms believe they can charge without attracting an entry of new firms, in other words, the limit price is the entry-preventing price.
Assumptions
1. products of the firms, already established are homogeneous.
2. Collusive oligopolists seek to maximise long-run profits.
3. There is a given determinate demand curve for the industry product. Corresponding to this stable demand curve, there is marginal revenue curve.
According to Bain, the limit price is determined by
(a) The costs of the potential entrants,
(b) Price elasticity of demand for the industry product,
(c) The size of the market, that is, the magnitude of demand for the product, The number of established firms in the industry,
(e) on the level and shape of the long-run average cost (LAC).