Microeconomics Discussion Response
A low-cost price leader could enforce its leadership through implied threats to a rival by increasing production at a lower operating cost. Let’s say a manufacturer can increase it’s output by 40% while only increasing operating costs by 10%. The low-cost price leader could then say they have the ability to over saturate the market with their product while still keeping a lower price. This would be most effective in a oligopoly, where the competition is limited and the market is shared. An example of an oligopoly would be your local cable companies, where in this example one company could build up infrastructure to support a larger area allowing them to bring in more customers. If the company can bring in more customers while keeping operating costs roughly the same, they can keep the price low and take over the market. Using the knowledge of being able to expand while keeping prices low, that cable company can prevent other companies from lowering prices in competitive areas with vague threats of expansion with superior service and lowers costs.
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