<P> A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries . The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output . The limit price is often lower than the average cost of production or just low enough to make entering not profitable . The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition . </P> <P> The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response . This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible . A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not . An example of this would be if the firm signed a union contract to employ a certain (high) level of labor for a long period of time . In this strategy price of the product becomes the limit according to budget . </P> <P> A loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales . This would help the companies to expand its market share as a whole . Loss leader strategy is commonly used by retailers in order to lead the customers into buying products with higher marked - up prices to produce an increase in profits rather than purchasing the leader product which is sold at a lower cost . When a "featured brand" is priced to be sold at a lower cost, retailers tend not to sell large quantities of the loss leader products and also they tend to purchase less quantities from the supplier as well to prevent loss for the firm . Supermarkets and restaurants are an excellent example of retail firms that apply the strategy of loss leader . </P> <P> In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output . By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor . Businesses often set prices close to marginal cost during periods of poor sales . If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned . The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all . </P>

Pricing tactics lower the price of a product below cost