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Limit pricing.

For several years, Palm was the dominant manufacturer of PDAs (personal digital assistants). As a number of other manufacturers have since entered the PDA market, eroding Palms market share and profits. Assume that prior to other firms entering the market, Palm earned profits amounting to $100 million per year. By reducing its price of PDAs by 50 percent, Palm could discourage entry into market, but doing so would cause its profits to sink to $5 million. By pricing such that other firms would be able to enter the market, Palm profits would drop to $75 million for the indefinite future. In light of these estimates, do you think it would have been profitable for Palm to engage in limit pricing? Is any additional information needed to formulate an answer to this problem: describe?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M923171

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