Sub: Economics Topic: Micro Economics
Question:
Pricing strategies and economic profit
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Many home improvement retailers like Home Depot and Lowes have low-price guarantee
policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to
beat the lowest advertised price by a given percentage. Do these types of pricing strategies
result in cutthroat competition and zero economic profits? If so, suggest an alternative pricing
strategy that will permit these firms to earn positive economic profits.
Solution:
The low price guarantee pricing strategy sometimes earns the zero economic profit. As long as
the price is greater than the average cost, the firm can earn economic profit .But if the low
price guarantee pricing strategy continues for a long , the price comes down to such a low level
that it equals to AC, the firm will only able to earn normal economic profits.
Alternatively they can go for penetration pricing strategy. A penetration pricing strategy sets a
low price as a market weapon. Many firms begin penetration pricing with the intention of
increasing prices in the future. In this case marketers often price the products noticeably lower
than the competitors. Once the marketers achieve some market recognition through
consumers trial purchase, they can raise the price to the competitive products and earn
economic profit.
** End of the Solution **
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