Economic growth and economic development 564

Introduction to Modern Economic Growth discussed, limit pricing results from process innovations by some firms that now have access to a better technology than their rivals Alternatively, it can also arise when a fringe of potential entrants can imitate the technology of a firm (either at some cost or with lower efficiency) and the firm may be forced to set a limit price in order to prevent the fringe from stealing its customers We summarize this discussion in the next proposition: Proposition 12.1 Consider the above-described industry Suppose that firm undertakes an innovation reducing marginal cost of production from ψ to λ−1 ψ If pM ≤ ψ, then firm sets the unconstrained monopoly price p1 = pM and makes profits (12.3) ¡ ¢¡ ¢ π ˆ I1 = D pM pM − λ−1 ψ − µ If pM > ψ, firm sets the limit price p1 = ψ and makes profits (12.4) π I1 = D (ψ) ψ λ−1 −µ