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Examples of sellers who often use performance-based pricing are real estate agents, online advertising platforms, and personal injury attorneys. Performance-based pricing increases the risk of the seller but it creates opportunities for greater rewards. Sellers who use this pricing strategy have an advantage in attracting customers.
Important to note, Bertrand's model of price competition leads to a perfect competitive outcome. [7] This is known as the Bertrand paradox; as two competitors in a market are sufficient to generate competitive pricing; however, this result is not consistent in many real world industries. [5]
Price skimming. Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. [1] By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as well as profit off of a higher price in the market before new competition enters and lowers the market price. [1]
The SSNIP test only measures competition based on price and thus cannot be considered a catch-all or fully sufficient tool for defining markets. [7] Furthermore, many economists have noted an important pitfall in the use of demand elasticities when inferring both the market power and the relevant market.
A price war is a form of market competition in which companies within an industry engage in aggressive pricing strategies, “characterized by the repeated cutting of prices below those of competitors”. [1] This leads to a vicious cycle, where each competitor attempts to match or undercut the price of the other. [2]
Dynamic competition. Repeated interaction or repeated price competition can lead to the price above MC in equilibrium. [7] More money for higher price. It follows from repeated interaction: If one company sets their price slightly higher, then they will still get about the same amount of buys but more profit for each buy, so the other company ...
Uber's pricing policy is an example of short-term demand-based dynamic pricing. It uses an automated algorithm to increase prices to "surge price" levels, responding rapidly to changes of supply and demand in the market. By responding in real-time, an equilibrium between demand and supply of drivers can be approached.
[example needed] The more contestable a market is, the closer it will be to a perfectly contestable market. Some economists argue that determining price and output is actually dependent not on the type of market structure (whether it is a monopoly or perfectly competitive market) but on the threat of competition.