Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Limited pricing effectively acts as what?

1. A strategy to encourage new competitors

2. A monopoly aimed at discouraging market entry

3. An incentive for consumers to buy more

4. A regulatory measure imposed by the government

The correct answer is: A monopoly aimed at discouraging market entry

Limited pricing can effectively create a monopoly aimed at discouraging market entry by setting prices low enough to make it difficult for new competitors to gain a foothold in the market. This strategy involves a firm pricing its products or services below a certain level to limit the profitability potential for other businesses looking to enter the market. When an established player uses limited pricing, it can deter new entrants who perceive that the market will not be sufficiently profitable to justify their investment. By employing such a pricing strategy, the incumbent firm sustains its monopoly power, which allows it to maintain control over the market share while mitigating competition. In addition, this approach can create a perception of lower consumer prices, effectively dissuading consumers from switching to potentially better offerings from new entrants, thereby reinforcing the monopoly position further. Other potential choices do not fit as well because they either suggest encouragement of competition, incentives for buying more without specifically tying it to a monopoly, or imply regulatory actions typically not associated with market-driven pricing strategies.